Dublin University’s financial newspaper

24 OCTOBER 2012 ISSUE 2 VOL 2

BY BISHOY ABDOUDesign Editor

The banking group Lloyds is considering radically reforming its method of compensating bankers. The firm may propose to eliminate annual bonuses in favour of various longer-term incentives. The firm is 40%-owned by the UK government, after it needed capital injections due to impaired loans following the financial crisis.

This comes on the heels of pub-lic outrage and shareholder dismay

at compensation structures that didn’t adequately reflect perfor-mance, and which were partially blamed for the financial turmoil of recent years. At many firms share-holder value was destroyed while employees received large payouts. It is a recurrence of this that many in Lloyds and the wider financial in-dustry are determined to avoid.

Many individuals and policy think tanks have advocated a shift away from cash bonuses to a di!er-ent model, where bankers’ pay is tied to how the business performs

over a defined period. This design is intended to better align the interest of bankers with those of the share-holders.

There have been numerous at-tempts by banks such as HSBC in recent to alter how their employ-ees are paid. In many jurisdictions these changes are now required by law.

Lloyds have denied that changes are imminent, stating “We keep our remuneration plans under review at all times but have no current plans to change our structures and do not expect to do so in the forseeable fu-ture.” It is speculated that the 2014 pay round could be a!ected by any planned modifications, however, it is also possible that the idea might

be set aside.Lloyds decision on this matter

could be indicative of which way the industry is heading as regards pay.

No financial institution has yet fully implemented an overhaul, suggesting there may be significant practical di"culties associated with ending traditional annual bonuses.

Bonus reformproposals at Lloyds

› Lloyds Banking Group is the latest to seek to overhaul its remuneration structure

» Cash bonuses may be discontinued » Potential move motivated by public outrage

and shareholder concerns » Longer term incentives may be introduced

DEBT REPORT P13

INTERN INTERVIEWSP10-11

It was announced earlier this week that Newsweek, the iconic American political publication, will not live to see its 80th birthday, as the publication completes its tran-sition to digital format by ending its printed edition.

This switch will make Newsweek the most widely read political mag-azine to become a digital-only pub-lication, portending a trend of how traditional news outlets are being forced to adapt by changing market trends.

Since 2005, Newsweek’s circula-tion has plunged by approximately half to 1.5 million readers. Advertis-ing dropped more than 80%, while the magazine’s annual losses had reached an estimated $40 million.

These losses are rumored to have provoked a more aggressive mar-

keting policy by the publication, who recently featured controversial articles by Niall Ferguson and Ayan Hirsi Ali as their cover stories.

Founded in 1933 by a former Time journalist, Newsweek has been a regular American co!ee ta-bles, having gained worldwide re-nown for its eclectic features and its ground-breaking stories.

Two years ago Washington Post Co. sold the magazine for $1 to Sid-ney Harman, an audio equipment tycoon who later merged the maga-zine with the Daily Beast website.

Last year, Sidney Harman’s fami-ly decided to pull its resources from the magazine, leaving it more reli-ant on its its own, steadily declining, resources.

Tina Brown, the current Editor in Chief of the Newsweek/Daily

Beast, said she had long been ex-ploring avenues towards ending the printed edition, stating that it was a matter “when” not “if.”

By eschewing print, the maga-zine anticipates that it will save “tens of millions of dollars” in print-ing and distribution costs.

Fears loom over the prospect that the move will not be as rational as they currently moot. Without guarantees that current Newsweek subscribers will switch over the their new web edition or that adver-tisers will continue to funnel funds into the enterprise, Newsweek are entering unchartered territory.

It’s anticipated by the company that the magazine’s base rate of sub-scriptions, at $24.99 is going to lure many print subscribers.

Experience of some online-

publications is mixed. US News & World Report, which went online in 2008, continues to be profitable, attracting 5.6 million unique users per month. The content, however, is largely free.

Newsweek will have help of its conjoining website, The Daily Beast, as a promotional tool for its content. The Daily Beast’s tra"c has grown 36% in the last year to 5 million unique users per month, ac-cording to statistics provided by the firm.

Under Mrs. Brown, Newsweek has become known for its contro-versial covers, including one of how Princess Dianna would reportedly look at the age of 50. Brown insists, however, that “the cover will play the same role it always has as a won-derful marketplace of ideas.”

Out of print - Newsweek ends an eraBY CATHAL O’DOMNALLAINDeputy Editor

› Newsweeks iconic cover - thing of the past

DUBLIN WEB SUMMIT

P5

NEWS & CURRENT AFFAIRSTHE BULL 24.10.20122

BP’S BOARD have approved a €20 billion deal with the Russian state oil company Rosneft to sell its stake in TNK-BP, safeguarding the British energy firm’s operations in Russia.

The deal will mean end its cur-rently troublesome partnership with Russia’s oligarchs, as they em-bark on a new operation with the country’s most powerful company – the Kremlin sponsored national energy champion.

The executive team received “strong support” from the UK en-ergy champion sell Rosneft its 50% stake in TNK-BP for a combination of cash and shares.

This transaction should end the company’s joint venture that has been highly profitable for the com-pany, but has proven highly con-troversial, with recent run-ins with the consortium of Russian-born billionaires grabbing the headlines

and dragging down BP’s share pric-es.

The previous attempt by BP to secure a $16 billion swap deal with Rosneft was blocked by the Alfa-Access-Renova, a conglomeration of Russian oligarchs.

Doubts persist over the ques-tion of whether or not the deal will be any less cumbersome than the former arrangement. The new partners, led by Igor Sechin, one of

President Vladimir Putin’s closest allies, Rosneft is still dominated by the state and some remain skeptical over the extent of BP’s influence in corporate decision-making.

BP will receive approximately 12.5% of Rosneft shares that the company holds in Treasury, as well as the Russian governmnet’s shares in a state investment vehicle, Ros-neftegaz. This is is on top of the 15-20% of Rosneft shares, currently valued at €10 billion. That would

leave BP the second largest share-holder of the Russian energy giant after the Russian state.

Company o"cials have urged caution, stating that important de-tails had yet to be worked out over the deal.

BP, which has owned approxi-mately 1.4% of the Russian company since it was initially floated in 2006, could now get two seats on the com-pany’s board to reflect its growing influence within the company.

EDITORTed Nyhan

DEPUTY EDITORCathal O’Domhnallain

LAYOUT AND DESIGNBishoy Abdou

Special thanks to Damien Carr and Antony Wolfe for all their help during the production.

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

This publication claims no special rights or privileges.

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

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

CONTRIBUTORS

VITAL INDICATORS

Windows 8 success make or break for Microsoft

1.6%CONSUMER PRICEINDEX

14.9%UNEMPLOYMENT RATE

-0.7%GDP GROWTH

1.3EURO - DOLLAR

!127mBALANCE OF PAYMENTS

A STRONG dollar is being blamed for a drop in McDonald’s net income from $1.51bn last year to $1.46bn for the third quarter of 2012. The health risks associated with fast food and the increased competition in the sector could also be factors in the downturn. 

Sales actually rose 2% in Europe, as McDonald’s famously made the news during the summer for open-ing their largest ever store in the Olympic Park in London. The ca-pacity reached 1,500 seats inside the store but has now been scaled down after the Games. Members of the public expressed concern that a fast food company could sponsor an event that promoted exercise and health, but controversy was averted as the store often had queues out the door during the Games.

Despite this 2% increase in sales, operating income decreased by 7% due to an appreciation of the dollar. Without this appreciation the op-erating income would have in fact been a positive 3% profit. The rise in the value of the dollar ensures that repatriation of profits back to the US are worth less. McDonald’s CEO Don Thompson cut a relaxed figure, saying that he “remained confident in the underlying strength in our business model”.

McDonald’s shares drop 4.5% as latest profits hit

MICROSOFT NET profit has fall-en over a billion dollars in the last quarter as its latest versions of Windows and O"ce prepare to be launched this autumn. The drop from $5.74bn to $4.47bn represents a 22% drop. Microsoft shares fell 3% upon the announcement. The company hopes that Windows 8 can fill the shortfall and provide a boost to the company’s share price. The amount of resources thaT Micro-soft has poured into their latest de-velopment means that if Windows 8 flops, the company could face more quarters in the red.

However, the figures for revenue do not include the $1.36bn in rev-enue that Microsoft have deferred to the following quarter, where they hope the success of their new oper-ating system Windows 8 will boost their shares. If this were added in Microsoft would have made a rela-tively small $9m profit. Nonethe-less, the decrease in revenue is re-flective of the sector as a whole, with the tablet market gaining ground rapidly on its laptop equivalent be-cause tablets are viewed as more portable, lightweight and cheaper than the average laptop. It remains to be seen whether Windows 8 would help reverse this trend to-wards tablets in the future.

BP to sell TNK-BP stake to Rosneft

BY ANTONY WOLFE

AN INVESTIGATION by the Sun-day Times has uncovered data on large US multinationals paying negligible tax rates on commercial profits dating back to 2010. Ebay, the online retain giant, is alleged to have paid only £1.2m tax on profits of around £800m in 2010, representing an average tax rate of .0015%. According to calculations they were liable for a corporation tax rate of £51m. In addition, co!ee giants Starbucks are accused of hav-ing of £8.6m of corporation taxes over a period of 14 years.

A spokesperson for eBay said that the company “works with tax authorities and complies fully with all applicable tax laws and regimes in Europe”, insinuating that their tax liability is payable to other countries in Europe. Facebook are just one example of a large US firm who have moved their headquarters

to countries like Ireland who pro-vide a competitive tax regime, in-cluding a relatively low rate of cor-poration tax. However, a report by The Guardian newspaper in April found that Amazon have paid no corporation tax to the UK treasury in the last three years, despite UK sales of £7.6bn.

Large US companies pay less than 1% tax on UK profits

› Joint at the hip - The Kremlin and Rosneft

3NEWS & CURRENT AFFAIRS THE BULL 24.10.2012

Obama’s swing-state blitzWITH ROMNEY closing in follow-ing his impressive debate perfor-mances, President Barack Obama will launch a round-the-clock, two-day campaign blitz through six bat-tleground states in an attempt to halt Romney’s recent advances.

Polls show that an improved de-bate performance had little or no ef-fect on his polling numbers against the former Massachusetts governor with just two weeks remaining until the November 6 election.

The pair and neck-and-neck as the election begins to reach its con-clusion.

Americans remain divided over the prospect of giving Obama more time to fix the economy, or putting a former private-equity executive

who argues that he knows how to create jobs at the helm of one of America’s most challenging times.

Obama will hit Iowa on Wednes-day, followed by Colorado, Nevada, Florida and Virginia, cast his ballot in his home town of Chicago, then stop in Ohio to end his tour.

“As the President crisscrosses the nation, he will spend time on Air Force One calling undecided voters, rallying National Team Leaders and Volunteers and continuously engaging with Americans,” his cam-paign said in a statement.

A Reuters/Ipsos poll on Satur-day showed Mr. Obama command-ing a tight lead, polling at 46% com-pared to Romney’s 45%. The poll has narrowed since Friday, when

Obama held a three point lead over his Republican rival, showing the limits of the bounce received fol-lowing Tuesday’s debate.

The key to the election appears to lie in Ohio, the Midwestern state where Obama has resiliently clung on to a narrow lead, with Romney making advances in Nevada, Iowa and Colorado.

A RealClearPolitics average of polls showed Obama leading Ohio by 2.5 percentage points, and Rom-ney ahead in Florida, another cru-cial swing-state by 1.5%.

By Cathal O’DomhnallainDeputy Editor

› Obama agressively intensifying his campaign

THE HEAVILY scrutinised Spanish banking crisis has seen increased criticism since the release of the results from the recent banking stress tests. The results were ini-tially welcomed by investors as the principal sum of €59.3 billion needed for banking recapitalisation seems substantially less than the maximum request by the Mariano Rajoy’s government of €100 billion, but analysts have since questioned the basis of the estimates for this principal.

The recapitalization results was met with mixed reactions from Spanish banks with Francisco González stated; “It is a very im-portant step to restore confidence in the Spanish financial system.”

Banco Popular set to avoid the state hand-out has called the tests “con-fusing” and “weakening.” Banco Popular’s share price dropped 10 per cent as it was told it needs to raise €3.2 billion in fresh capital, €2.5 billion by November. It is ex-pected that this funding will be raised by asset sales and share is-sues which are the predominant factors influencing the share price fall. The now colossal task falls on the Spanish government to imple-ment economic reform and reduce budget deficits. Doing so is only the beginning of dealing with the vola-tility that is a!ecting the Spanish banking sector and eventually re-storing investor confidence.

Spanish tests fail to relieve investor stress

A NEW Irish Times/Ipsos MRBI poll published last week has shown that satisfaction with the current Irish government has dropped 6 percentage points since a simi-lar poll last May. Satisfaction with the government now stands at just 21%, with 73% saying that they are dissatisfied. The government par-ties, Fine Gael (down 1 to 31%) and Labour (up 2 to 12%) will individu-ally take solace in the fact that their support has remained consistent, but with December’s budget loom-ing and likely to be as tough, if not tougher, than recent years, it is hard to know how long this can last.

However it was Fianna Fáil’s support level which was the big surprise of the poll, rising 4 to 21%, once again making it the second most popular party in the state, the first time in well over two years. This bounce appears to have come at the expense of Sinn Fein, who dropped 4% down to 20%, just nar-

rowly behind Fianna Fáil in third. It’s di"cult to pinpoint the exact

reason for Fianna Fáil’s rise, with some highlighting their vocal pres-ence in the Dáil during the recent controversies over Health Minister Dr. James Reilly and the resigna-tion of Labour’s Róisín Shortall. Others have cited Fianna Fáil lead-er Miceál Martin’s performance in last month’s RTE Prime Time debate between himself and Gerry Adams, while the party itself has claimed the work of its new ‘Local Area Representatives’, are helping the party’s support base in Dublin where it no longer has a TD. How-ever the real test for the party will come in December at budget time where they will seek to avoid being drowned out by fellow opposition party Sinn Fein as well as the Dáil’s large number of independents.

The Greens struggled to make an impact without any TDs, continu-ing to languish at 2%.

FF support rises

NEWS & CURRENT AFFAIRSTHE BULL 24.10.20124

BY BISHOY ABDOUDesign Editor

FORMER PROPERTY tycoon Sean Quinn avoided jail, despite being handed a two week reprieve by a Dublin court in spite of the emer-gence of new allegations of illegality made by Anglo Irish Bank.

His son, Sean Quinn Jr., was also released from prison after serving a three-month sentence for con-tempt of court.

Quinn, who was once Ireland’s richest man but has since declared bankruptcy, appeared before court in relation to his role in a complex scheme in relation to a €500m property portfolio beyond the reach of Anglo Irish.

In June, justice Elizabeth Dunn judged that Mr Quinn, his son Sean Quinn Jr and his nephew Peter Dar-ragh Quinn were in contempt of court and ordered him to reverse a scheme which aimed to strip assets from Anglo Irish. She said asserted that the three men had behaved in a “blatant, dishonest and deceitful manner” and consequently sen-tenced Sean Jr to a three month prison sentence.

Quinn, who was given three months to purge his contempt, was said to have done nothing to revoke it, according to lawyers represent-

ing Anglo Irish. There were also re-newed allegations that he had taken actions in recent days to strip assets from the bank.

Counsel for Quinn said he was cooperating with Anglo Irish in its e!orts to safeguard the assets. They also contested that Quinn’s age and health conditions should be fac-tored in prior to applying any puni-

tive measures. Justice Dunne said the new evi-

dence was of “great concern.” She adjourned the court hearing for two weeks in order to give time a a Belfast-based legal team to prepare a new defence for the former bil-lionaire.

This past week over 6,000 peo-ple attended a public rally in Cavan

to support Quinn, who built a €6 billion property empire in Ireland over the past 40 years. His fortunes collapsed after he failed to hedged-multibillion-euro bets on shares in Anglo Irish, the bank that caused the maelstrom at the centre of the Irish banking collapse.

Quinn avoids jailThe Live Registere recorded a

monthly decrease of 400 in Septem-ber 2012, bringing the total number of unemployed to 435,000 accord-ing to a report released by the CBO.

The standard rate of unemploy-ment in September 2012 was 14.8%, unchanged from the monthly rate in August 2012.

The survey found a monthly de-crease of 100 males in September 2012, while females decreased by 300 during the same period.

The number of long-term claim-ants on the Live Register in the month of September was 192,778. The number of male long-term claimants increased by 3,354 in the year to September 2012, while the number of females claiming for these benefits increased by 6,025.

In September 55.1% of all Live Register dependents were short-term claimants, down from 58.1% in September 2011.

There were a total of 85,090 cas-ual and part-time workers on the Live Register, representing 19.8% of total claimants.

The total number of people un-der the age of 25 on the Register showed a steady decline from Sep-tember 2011. These rates, however, may reflect increasing emigration rather than a better employment outlook.

› Sean Quinn exiting court

GLOBAL STOCKS on crude oil fell on Friday, while investors main-tained a bleak view of US corporate earnings after both General Elec-tric and MacDonald’s stocks disap-pointed, while failure to stem the Euro-Crisis and ongoing fears of a global slowdown heightened fears investors’ fears.

The dollar performed strongly against the Euro, primarily due to a perceived lack of progress on a Spanish bailout. The CBOE Vola-tility Index. VIX, the ‘fear gauge’, jumped 13.5% to 17.06, its highest level since September 5.

Google and Microsoft also re-ported earnings well below analysts’ estimates, contributing to the S&P’s 1.7% loss - its biggest since June.

European shares su!ered be-cause of signs of disagreement among EU leaders over how to help the Union’s peripheral banks.

US stocks extended their slide to more than 1.5 percentage points as earnings from large multinational underscored the e!ects of the eco-nomic slowdown.

The market is also expecting the Federal Reserve to to increase its benchmark interest rates in 2014 rather than 2015

Live Register decreases in September

Investors fearful amid fears of global slowdown

5TECHNOLOGY & BUSINESSTHE BULL 24.10.2012

With over 4,000 at-tendees reported to have passed through the doors of the RDS,

the Dublin Web Summit (DWS) has come a long way from its humble origins in 2010 where just 600 peo-ple squeezed into the Chartered Ac-countants House to listen to various tech wizards speak. In similar fash-ion the Web Summit has not only exploded in Dublin, but interna-tionally as well. It has been brought to London, New York and is Berlin bound in December. A trip to San Francisco seems inevitable.

Among the 4,000 attendees this year were 200 incredibly inspiring speakers (ranging from Skype’s co-founder Niklas Zennström to Cindy Gallop of Make Love Not Porn) and over 250 start ups from all over the world who came to Dublin, many for the first time, to network, pitch, invest and keep tabs on the compe-tition. Dublin it would seem is most certainly open and ready and means business.

Integral to the summit’s pulling power is the Electric Ireland “Spark of Genius” competition which of-fers the tech titans of tomorrow the enviable opportunity to pitch their ideas to a panel of noted investors, entrepreneurs and media. The win-ning enterprise walks away with a handsome cheque for €100,000 and a rather awful looking blue haired award. In previous years, SPARK was an exclusively Irish a!air though DWS’ accelerated global ex-pansion has forced geography to be-come redundant – a common theme throughout the conference.

The 2012 competition received over 1,000 entries that were short-listed to just 100 across four product categories (social, mobile, customer

and enterprise). Each shortlisted company then pitched their busi-ness idea from one of two stages in the Main Hall on both days of the summit, with the sixteen semi-finalists and four finalists pitching from the Main Stage in the final hours of the summit.

Notably there were no Irish fi-nalists in 2012, though their pres-ence was certainly felt throughout the pitching process. The finalists came from Silicon Valley (Smart-

Things), Singapore (Vibrease), Finland (Ovelin) and Sweden (Tic-tail) – a feat which will inevitably boost the summit’s international reputation and could very well pay dividends for Dublin in the future as these incredibly diverse companies expand and look to establish inter-national o"ces.

SmartThings, a company that

enables everyday objects to be-come smart took home the hideous electric blue mohawk mannequin award. The company provides a platform that is (unsurprisingly) connected to the internet and oth-er ordinary devices to sense and control real world things. They basically provide software to en-able your smart phone to close the window you forgot to shut, turn o! a light that has been left on and open doors you are too lazy to open yourself. Handy indeed. In collect-ing the award, Alex Hawkinson, the founder, remarked that when SmartThings looked to open o"ces abroad, Dublin would be a definite location. A moment that Cosgrave and the wider DWS team undoubt-edly savored.

Hosting Europe’s largest tech conference in Dublin has more than a few positive knock on e!ects. One of the most significant spin o!s is the f.ounders event that kicked o! when DWS o"cially wound down on Thursday. f.ounders is an event so influential in techie terms that Bloomberg describes it as resem-

bling a ‘Davos for Geeks’. And al-though it is probable that f.ounders will exclusively be held in New York over the coming years, the small fact that the ‘who’s who of tech’ original-ly and for the moment continue to converge in Dublin to talk, network and brainstorm is incredibly impor-tant for Ireland Inc.’s reputation and resilient commercial image.

Whilst f.ounders attracts the heavyweights of cyberspace, START 150 is an exclusively start-up focused event within DWS that brings together 150 of the most up-and-coming, ‘disruptive’ (a key buzz word within tech talk) start-ups. These uniform Converse wear-ing entrepreneurs are a!orded invaluable networking opportuni-ties at every corner, are wined and dined upon arrival and are never left standing out in the rain. Each would-be Steve Jobs and Victoria Ransoms (of Wildfire, the global leader of social media marketing recently acquired by Google for a small $300million) bursts with a passion so enthusiastic that at times can be overwhelming. But overwhelming in a good sense of the word – recession resembles an alien word in their vocabulary.

A personal favourite START of mine was an English based com-pany, Foodity, that allows hungry, app-enabled consumers to build online grocery baskets direct from published recipes on their smart phones/devices. Their idea was like many others discussed over co!ee, conversation and cocktails during the conference – ideas so beauti-fully simple that you wonder rather annoyingly why you never thought of it in the first place. Take for in-stance another UK based company, Recite Me, which makes websites accessible to anybody, anywhere by

either reading aloud the content or adjusting the page presentation to facilitate those with learningdi"-culties like dyslexia and those with visual impairments. Or the Irish company that turns boring and rather infuriating tasks, like prov-ing to Ryanair that you are human when booking flights, into fun, en-gaging games. So simple, and yet so annoying that someone else got there before I did.

For those attending the confer-ence, one could only be inspired, excited, and where truth be told, rather relieved that jobs are avail-able in Dublin and in Ireland for

graduates and experienced profes-sionals alike. Dublin Web Summit has solidified its position on the global tech calendar and can only progress to continue to play an af-firmative role in Ireland’s economic recovery. Every person I spoke with at the summit spoke of optimism and with enthusiasm. Those who were from overseas spoke with a sense of reverence about Ireland’s position within the tech sector – how encouraging is that? My only hope is that the infectious euphoria fostered in the RDS and Mansion House this week is able to filter into the mainstream media and to actu-ally encourage a rehabilitation of our morale.

250 START-UPS FROM ALL OVER

THE WORLD DUBLIN...IS MOST CERTAINLY OPEN

AND READY, AND MEANS BUSINESS

Clare Dunne reports on Europe’s largest tech gathering

› Cindy Gallop, of Make Love Not Porn, was a speaker at the summit

TECHNOLOGY & BUSINESSTHE BULL 24.10.20126

IN THE past two years, $20 billion has been spent on a patent litigation and patent purchases in the smart phone industry alone. In 2011, Google and Apple spent more on this than they did on research and development of new products. Pat-ents are designed to protect intel-lectual property, to give an inventor the sole right to make, use, or sell an invention. The problem is that pat-ents are designed for an industrial world, to prevent others from copy-

ing machinery or tools. Now, in this digital age, companies are racing to patent concepts and abstract ideas before they even know how to phys-ically create the concept. Corpora-tions are using patents as weaponry, and buying out other companies solely to increase the number of patents they own. Patent law in the digital sector has come to be a hin-drance to innovation, and needs to be reformed to promote growth and competitiveness.

Patents were designed for an in-dustrial age, where inventors feared that their machine or tool would be copied, and that they would not receive compensation for the re-search, development, and invest-ment that went into creating a product. Eli Whitney patented his specific cotton gin design, not the idea that a machine could remove a seed from cotton. In 2004, even before Apple created Siri or the iPhone, the company applied for a patent to use one interface to search through multiple databases, i.e. to search through the Internet, your contacts, and even your iTunes, all at once. Without stating how this would technically work or how the software would function, Apple was granted the patent that essentially gives them ownership to any search engine that searches more than one database at a time.

In the technology sector, as soon as a startup creates even a moder-ately successful product, a patent holder will sue them and claim in-fringement on their patented con-cept. All basic technology for com-puters is patented, and there are companies just waiting to sue new entrants to the market. In August, Google announced that they were buying Motorola Mobility with the intention of acquiring more patents to use in this never-ending patent war. Edmund Phelps, Nobel laure-ate in Economics, remarked last

Tuesday in his address to The Uni-versity Philosophical Society and the Student Economic Review that a start-up in Silicon Valley needs to employ more lawyers than engi-neers to protect themselves against patent warfare, and stressed the need for U.S. patent law reform.

Today in the U.S., when a tech company takes out a patent, it is granted for 20 years, even if the patent is not used to innovate, but merely as protection. Many in the field are suggesting that patents are unnecessary and should be thrown out completely. Large, well-estab-lished corporations, like Apple and Google, argue that they need pat-ents to be adequately compensated

for their research and development. This argument sounds unreason-

able when one considers that Ap-ple is making over a billion dollars a week from iPhone sales, making back the costs of invention as well as

a robust profit. Others are pushing for shorter patent terms in the tech-nology sector, of three or five years, which would allow patent law to re-flect the rapidly changing industry and encourage more start-ups to enter the market.

Patent laws exist to benefit so-ciety, not just large corporations. They should incentivize innova-tion, competition, and new entrants into the market. For decades, the U.S. has been a leader in innovation and creation. In this digital age, the American economy largely relies on the technology sector for growth. In light of this, patent laws need to be reformed to prevent innovation grinding to a halt in this sector.

Ending the patent wars

IN SPITE of the many and abound-ing pseudo-legal disclaimers and copyright notices we see popping up on our newsfeeds of late, from con-cerned friends and acquaintances desperately attempting to restrict Facebook’s use of their “private” data, Facebook does own what we post on their site… so tough. We pay

for the myriad conveniences and social goods this free social network brings about by relinquishing rela-tively trivial private information. Most users would agree (in fact all users have, by virtue of signing up in the first place, already agreed) that this is a pretty good deal.

However, developments this

month may signal a shift in rev-enue model for the Social Media giant as it attempts to stabilise its recently floundering market value. The seemingly innocuous introduc-tion in the US, of a feature allow-ing regular users to promote a post for somewhere in the region of $7,

could be a signal of a profound shift away from the company’s original and founding premise of a service that is “free, and always will be”.

Facebook claim in some exam-ples, that the feature (a small “pro-mote” button that is optional before publishing a post/photo) may in-crease a posts visibility on the news-feed by as many as 3.8 times. While the company have downplayed the

introduction of this feature as a rather harmless and relatively cost e!ective way of promoting particu-larly important events in one’s life, such a wedding or charity drive, if we examine the potentially suspect economics behind the move, the implications are somewhat more ominous and far reaching.

Facebook are wandering into the murky economic territory of artifi-cial scarcity creation. For some time now the social network has been es-sentially reducing the average user’s visibility by arranging the newsfeed not chronologically, but according to an algorithm known as EdgeR-ank. While it can be argued that the algorithm throws up a more rele-vant, curated feed of news, it means however that a typical post is seen by only 16-18% of your friend. Even when arranged chronologically (a feature that is certain to be phased out), users report that only about 10-20% of their friends’ activities are actually showing up. Combining this trend with the introduction of promoted posts, Facebook are es-sentially retracting users’ visibility and then attempting to sell it back to them.

With the network recently achieving a landmark 1 billion ac-tive users, is this a move in the di-

rection of a more sustainable and realistic revenue model, one based on the “Freemium” model success-fully employed by peers such as Linkedin? Potentially. Startlingly, if Facebook could convince each of

its users to promote just one post a year, the company would almost double its revenue, a statistic the company’s currently discontented investors would welcome. However, to generate any revenue at all the company must remember, it needs to retain its user base, and, with multiple viable substitutes emerg-ing, it’s questionable whether or not Facebook can maintain its monopo-ly of where we go for social visibility online into the future.

Jane Casey argues for the reform of America’s dysfunctional patent system.

CORPORATIONS ARE USING

PATENTS AS WEAPONRY...A HINDRANCE TO

INNOVATION

› The clash between Apple and Samsung is an example of a high profile patent conflict

Facebook: It’s free and always will be?

FACEBOOK ARE WANDERING

INTO THE MURKY ECONOMIC TERRITORY

OF ARTIFICIAL SCARCITY CREATION

FACEBOOK ARE ESSENTIALLY RETRACTING

USERS’ VISIBILITY AND

ATTEMPTING TO SELL IT BACK

By Gabriel Corcoran

A START-UP IN SILICON VALLEY

NEEDS TO EMPLOY MORE

LAWYERS THAN ENGINEERS

7TECHNOLOGY & BUSINESSTHE BULL 24.10.2012

Consider the following hypothetical situation. Imagine you need a new pair of shoes. The usual way to go about

acquiring these would be to pur-chase them, either online or in the traditional shop front. Instead, im-agine this: you design a pair of shoes exactly to your preferred style, size and colour specifications on your computer or download an already existing design from the web and then simply hit the print button and wait for a device on your desk to print out your shoes.

Herein lies the concept of 3-D printing, which is also known as “additive manufacturing”; products are built up by progressively add-ing material, one layer at a time, as opposed to the old, “subtractive” method of reducing the raw mate-rial to the final product . Rather than explaining the process of 3-D printing in detail (which would re-quire a lengthy treatise and a PhD in mechanical engineering), it is more interesting to examine its current state and its likely implications for the future.

The kind of technology that would enable one to print out a pair of shoes is not yet here, but it is get-ting close. Today 3-D printers are capable of using materials such as plastics, ceramic, glass and metals. However, they are not yet capable of producing multiple materials at once, so we are unlikely to see 3-D printed mobile phones or comput-ers any time soon. This represents a significant hurdle that must be overcome if we are to see such com-plex items being printed. Yet, re-searchers are confident that this is a matter of ‘when’ as opposed to ‘if’.

As with computing in the late 1970s, 3-D printing is currently confined to hobbyists and workers in academia and industry. But like

computing before it, 3D printing is spreading rapidly as the technology improves and costs fall. To put this into perspective, a basic 3-D printer now costs less than a laser printer did in 1985.

Basic 3-D printing is now begin-ning to become more cost e!ective and a!ordable for the home user.

Companies such as MakerBot are at the forefront of this change. While high end printers range in price from 25,000 to over 100,000 dollars, the hobbyist can purchase the Mak-erBot ‘Thing-O-Matic’ for as little as 1,300 dollars. The raw material for this is plastic and a one pound spool of plastic costs a mere 20 dol-lars. Such a machine is only capable of producing basic items includ-ing figurines and kitchen utensils, among others.

MakerBot has recently intro-duced the Replicator 2, with CEO Bre Pettis likening its introduction to the “Macintosh moment” of the PC industry nearly thirty years ago, when PCs were machines that could only be used by programmers to machines that would come to en-rich the lives of ordinary people.

No longer do consumers have to go through the previously di"cult task of designing the objects to be printed themselves. CADs (Com-puter Aided Designs) can now be easily made by the everyday user, or simply downloaded from the in-ternet from sites such as Shapeways and Thingiverse. One can download designs for items such as a vase, an iPhone protective cover, board

game pieces and wall hooks. They can then be printed o! at home by the end user.

It should be clear at this stage that the 3-D printing industry is on the verge of a breakthrough, the implications of which for manufac-turing, the economy and society as a whole are staggering.

If 3-D printers are to become a common fixture in every home, just as the PC did, then the results would be economically “disruptive” to say the least. If one could print just about anything in their own home, then manufacturers would become obsolete. The manufacturer in this situation would be the designers. Factories, warehouses and shipping would no longer be needed. The concept of being able to produce anything at home is similar to the replicator in Star Trek. Yet this is within the realm of possibility and is in fact closer to reality than fic-tion.

It has been posited that the pro-liferation of the 3-D printer will have as significant an e!ect as the Industrial Revolution. It has even been dubbed as “Industrial Revolu-tion 2.0”. This is where the similar-ity ends. While the Industrial Revo-lution led to major economies of scale, 3-D printing will have the op-posite e!ect. With 3-D printing, the marginal cost of producing a single unit is the same as for producing thousands of units. In this regard, mass production could give way to mass customisation, given that no extra cost is incurred.

3-D printing is far less capital intensive than traditional manufac-turing. Thus, it now becomes com-paratively cheap for an individual to produce a good. Producing pro-totypes for example has never been so fast and inexpensive. As a result, barriers to entry should be greatly reduced. This in turn should lead to

greater innovation. Not only is 3-D printing cheaper than traditional manufacturing, it also leads to less waste on account of its “additive” nature, which means that no more raw material than is necessary is used.

It could also lead to a possible resurgence of Western manufactur-ing. Asian economies will no longer have the advantage of low labour costs, as labour becomes more ob-solete the more advanced 3-D print-ing becomes. This argument is less than convincing however, as Asian economies will be just as able to take advantage of the new technol-ogy as their western counterparts.

The commercial and medical applications of 3-D printing are limitless. For example, a California-based firm, Contour Crafting, has created a giant 3-D printing device for building houses. At the opposite end of the spectrum, two MIT stu-dents recently developed the Pop-Fab, a 3-D printer that can fit into a small suitcase. On the microscopic

scale, scientists have developed a process called “3D-photografting,” which can potentially be used to grow living tissue. This means that it may even be possible to print entire organs for transplant. Cus-tomised artificial limbs are already being produced using 3-D printing technology.

Not only will the proliferation of 3-D printing change the nature of

manufacturing, but copyright laws will also quite literally have to be rewritten.

For example, by scanning and then copying everyday items such as a mug, a lamp or even pieces of fur-niture, one is not necessarily break-ing any copyright laws. According to Michael Weinberg, a senior sta! attorney with Public Knowledge, a Washington digital advocacy group “if an object is purely aesthetic it will be protected by copyright, but if the object does something, it is not the kind of thing that can be pro-tected.”

There also exists the ethical question of what one can and can-not print. For example, all of the parts for a handgun were recently produced using a 3-D printer. The goal of distributing its design across the web has been stalled by the manufacturer of the printer, Strata-sys. In an attempt to stops its prod-uct from being used for unlawful ac-tivity, it asserted that the individual in question did not possess a fire-arm manufacturing. This legal grey area has lead to controversy.

The pace at which this technol-ogy will improve, and its e!ects, are almost impossible to predict. It has even been posited that the improvement in this technology may stall, and hit a trough in the Gartner hype cycle. More likely is that something similar to Moore’s law will come into play, which will dictate the pace at which the reso-lution of 3-D printers improve. One thing for sure however is that 3-D printing is here to stay (the industry is expected to grow to $3.1 billion by 2016 and $5.2 billion by 2020, ac-cording to research group Wohlers Associates). Being able to design and print a pair of shoes in your own home may someday- in the not too distant future- no longer be a mere pipe dream, but a reality.

The next productivity revolutionAndrew Winterbotham explores the potential of 3-D printing and its effects on industry and society

THE 3D INDUSTRY IS ON THE VERGE OF A

BREAK THROUGH

3D PRINTING IS FAR LESS

CAPITAL INTENSIVE THAN

TRADITIONAL MANUFACTURNG

MARKETS & FINANCETHE BULL 24.10.20128

It was confirmed on October 10th that the planned merger of aerospace and defence manufactur-ers BAE Systems and EADS had col-lapsed.

Disagreement between the UK, French and German governments has been cited as the primary rea-son behind the deal’s collapse.

This was subsequently con-firmed by a joint statement released by the two firms shortly after news of the collapse broke: “it has be-come clear that the interests of the parties’ government stakeholders cannot be adequately reconciled with each other or with the objec-tives that BAE Systems and EADS established for the merger.” BAE shares fell 2% in London trading as the news broke, while EADS shares jumped 3%.

The deal was intended to com-bine BAE’s expertise in military and defence with EADS’ aerospace jug-gernaut, Airbus. It would have cre-ated a defence and aerospace giant to rival Boeing of the US. It would also have marked the final consum-mation of a union of the French, German and British defence indus-tries that was originally mooted way back in the 1990s.

The bosses of BAE Systems and EADS had issued a joint appeal for political support for their proposed $45bn (£28bn) merger.

The UK government retains a “golden share” in BAE, giving it cer-tain veto powers. The UK sought a deal where its counterparts agreed to limit their influence in the merged firm in order to maintain BAE’s strong working relations with the US Pentagon. The US were con-cerned about any deal that relin-quished political control over BAE to the French and German govern-ments.

The French State together with aerospace company Lagardere jointly possesses a 22% stake in EADS. The French government had been concerned about potential job

losses in France, as well as protect-ing a European “champion” firm from any possible future takeover by non-Europeans.

The German government holds substantial influence through the shareholding of the privately-owned Daimler. The company owns 15% of EADS directly, but controls a 22% stake under an agreement with other German shareholders. The German government has confirmed that it is continuing to negotiate a buy-out of Daimler’s shares by the state-owned development agency KFW. It has been reported that the German government was highly

reluctant to allow EADS - owner of Airbus and therefore a strategically important manufacturer - to run it-self in an arms-length and commer-cial way. Once the German position

became widely known, BAE and EADS had no choice but to cancel the proposed deal.

The most significant bone of contention regarding the terms of the deal was the assertion by the UK government and the two company heads that directors appointed by the French, German and UK gov-ernments should not hold positions on the top board of the merged group.

BAE’s board had expressed “an absolute condition for the transac-tion that the French and German governments should never own more than 9% each of the merged outfits, that they should not vote

as a bloc and that they should not have representatives on the holding company board”.

This was required in particular to address the previously mentioned US fears about possible foreign gov-ernment influence over BAE. The US is BAE’s biggest single customer, and the UK firm is involved in clas-sified research and development projects for the US military.

On a broader scale, this reflects tensions within the EU as well as US power over European business. Let’s hope that news of the EU’s newfound status as a Nobel laureate organisation is a positive omen for this uneasy relationship.

IT WOULD HAVE CREATED A

DEFENCE AND AEROSPACE

GIANT

› Darkness falls on the universal banks

BAE-EADS proposed merger shelved following political stalemate

THE EU appears set to follow in the footsteps of the UK after a report recommending the ring-fencing of trading from commercial activities within banks was published.

The Liikanen Report is a result of the review of the European banking system by an expert group chaired by Erkki Liikanen, the governor of the Bank of Finland, ordered by the European Commission in Novem-ber 2011. The proposal that has re-ceived the most attention is that if a bank’s trading arm exceeds €100bn or 15-25% of its total assets, it must be assigned to a separate legal en-tity, although it may remain within the banking group. This allows for the continuation of the universal

banking model that has been en-trenched in the European banking system for decades.

The report produced four other key recommendations, including the drawing up of ‘recovery and resolution’ plans to help prevent systematic disaster should a bank stumble into di"culty. The intro-duction of ‘bail-in’ debt instru-ments whereby bank executives and private creditors would bear some of the losses if a bank went into distress, more stringent capital requirements and adjustments to corporate governance rules to en-sure a more amenable realignment of the interests of bank manage-ment, shareholders and consumers.

Much of the Liikanen Report re-flects the well-documented Vickers Report put forward in the UK. Dis-crepancies between the two do ex-ist, however, mainly in that Vickers suggests cordoning o! retail bank-ing instead of trading. Both, how-ever, fall short of the Volcker Rule due to be introduced as part of the Dodd-Frank Act in the US. This rule proposes a ban on proprietary trad-ing, implying that investment banks who trade for their own profits would be prohibited from lending to consumers. The key issue here is that the implementation of the three proposals will be problematic.

Firstly, we now face the prospect of divergence in the structure of the

banking industry in the US and Eu-rope. This will be of great concern to the financial centres most a!ected by the changes, most notably New York, London, Frankfurt and Paris. As an industry that has seen sig-

nificant global integration and the harmonisation of the US and Eu-ropean systems after the repeal of the Glass-Steagall Act in the US in 1999, heterogeneous legislative re-forms could have profound e!ects on banking.

Banks are chiefly footloose en-terprises and will be happy to pack up and relocate to the city with the least invasive regulatory require-ments, and none of these financial hubs are keen to lose ground on the others in the race to attract firms. A major source of concern for the western financial world is the po-tential eastward shift of the indus-try, with Singapore, Hong Kong and Dubai all waiting in the wings. It may be that banks will in future cluster in the city with the most flexibility and conceivable loop-holes in new legislation.

Another potential grievance is the further uncertainty created for the banks as they process the impli-cations of each rule on their practic-

es and balance sheets and seek new ways to adhere to all three while still generating profits. Not only must many major investment banks reform the way they do business, they must do in a climate of uncer-tainty caused by the implications of these proposals. Both the European Union and the British government are yet to draft legislation based on the respective reports. Given the significant lobbying that is likely to come, it may well be a considerably watered down version that eventu-ally comes into e!ect.

It is because of these issues that the unilateral implementation of these new proposals is urgently re-quired. A coordinated legislative reform across continents would mean that although the shock to the industry may be great, it would be a one-time occurrence, after which banks could adapt and recover. The lingering uncertainty that can dismantle financial systems, such as the cloud that has been hanging over the Eurozone over the past year as politicians have hesitated instead of acting, could be avoided. This would also prevent significant geographical distortion of the fi-nancial sector.

There is no doubt that the bank-ing industry is set to undergo funda-mental change worldwide and could see massive drops in profit margins. Whether this leads to an ignomini-ous battle between the US and EU, and potentially spilling into Asia too, remains to be seen.

EU proposes ring-fencing banking activities

NONE OF THESE FINANCIAL HUBS

ARE KEEN TO LOSE GROUND

› Governmental opposition topedoed the deal

Andrew Mulhair examines the international tensions which precipitated the merger’s collapse

By Cliona Nic Dhomhnaill

BAE AND EADS HAD NO CHOICE BUT TO CANCEL THE PROPOSED

DEAL

9MARKETS & FINANCE THE BULL 24.10.2012

GREECE IS facing its sixth year of recession. The Greek people are at breaking point, as is their economy. We have seen the hard left and the hard right emerge from relative ob-scurity in Greek politics in a popu-list anti-austerity backlash, while questions are beginning to arise over whether a Greek exit from the eurozone, ‘a Grexit’, could be engi-neered, and if this outcome could be more favorable than the painful austerity measures currently being imposed.

The European project of politi-cal, economic and financial inte-gration, begun in the aftermath of World War II, is facing a defining moment. Even the most die_hard fans of monetary union cannot rule out the possibility of Greece exiting the eurozone. As discussed in this column last month, the Outright Monetary Transactions (OMTs) have gone some way to allay the possibility, but doubts persist.

A possible Grexit scenarioThis is a summary of the four

main steps Euro policymakers and the International Monetary Fund (IMF) could take.

Step 1: Cut primary deficit fund-ing to the Greek government. The European Union Commission fore-cast a primary deficit (income less expenditure excluding bond cou-pons, interest etc.) of 1% of GDP in 2012 and 2% in 2013. In a first

instance, the Greek government would try to issue IOUs to its sup-pliers and employees. Domestic economic agents may have little choice but to accept the IOUs, but they would naturally seek to con-vert these as quickly as possible to Euro (or another major currency), and most likely at a discounted rate. This would mark a first hint of a dual currency system.

Step 2: Cut Greek Banks from European Central Bank (ECB) Open Market Operations (OMOs). A recapitalisation of Greek banks is currently underway, which should see the currently excluded banks re-admitted to the OMOs. In the event of the Greek government refusing conditionality, bank runs and non_performing loans could seriously erode the balance sheet of Greek banks, which would see them cut o! from the ECB’s OMOs.

Step 3: Stop payment on Greek debt. The Troika (IMF, EU Commi-sion and ECB) may opt to cut fund-ing for debt servicing and redemp-tion of Greek government debt. This would then trigger default.

Step 4: Remove the Central Bank of Greece from the Euro system. This would bring about a de facto Greek Euro exit. The government would have to rapidly establish the legal framework to create a new, credible currency to meet pay-ments, and, crucially, to secure es-sential goods for the Greek people, such as oil and medical supplies.

Investment strategies for the “what-if” scenario

As the euro crisis has dragged out, resulting in global slowdown, it has become clear that a Grexit is partly “in the price”. The 2 year German bond yield is virtually zero;

there are record euro shorts in the FX market and European indices with Southern Europe exposure are significantly under-performing their US counterparts.

FX strategy: Be short EUR/USD if Greece leaves. A Greek exit would take the EUR/USD to 1.10. The EUR/GBP, EUR/NOK and the EUR/SEK have fallen some dis-

tance but can easily fall further if there is a capital fight from the euro.

Rates strategy: Be long duration. The 10yr UST will reach histori-cally stretched levels at 1.50%. Fa-vour Gilts and Treasuries to Bunds.

Any solution to keep the eurozone together is going to require very accommodative monetary policy from the ECB for a long time. That anchors the front end of the Euro-pean curve but the safe-haven flows out of the peripheral bond markets into Bunds has gone too far.

Equity strategy: Be long defen-sive stocks. An orderly break away from the euro by a member state could cost the Eurostoxx 50 as lit-tle as 10%. A disorderly break up could see European indices drop by as much as 50%. The following is a good protection basket:

- Eurozone- BMW, Sanofi, Adi-das, Unilever, Paddypower, Publis, Akzo Nobel. Switerland- Roche, Nestle, Syngenta.

- The UK- Tesco, Reckitt Benck-iser, Royal Dutch Shell. Sweden- Volvo, Eriksson.

Emerging market strategy: Be tactically defensive on global

emerging markets. In rates, show preference to the front end of the curves in Hungary and Poland.

Faced with the obvious reali-ties of a Greek exit from the EMU, the most likely course of action is to stick with the status quo. An-gela Merkel reminded the German parliament that the “EMU is not just a monetary project but a po-litical one”. She also extended an olive branch to its country of origin, declaring that if Greece sought “a growth stimulus in the eurozone, which we could pursue in the inter-est of Greece, we’re open for this. Germany is open for this.” Draghi’s OMT’s go some distance to provide a stable future to the euro. The un-certainty pertaining to the euro-zone woes has abated, but it is by no means over.

Of course, the one thing we can be certain of is that this Greek trag-edy has an unfinished script…

What if Greece exits?Conor Lawlor outlines the “Grexit” scenario

THE TROIKA...MAY OPT TO CUT

FUNDING FOR DEBT SERVICING

EQUITY STRATEGY: BE

LONG DEFENSIVE STOCKS

MERGER AND acquisition activity has been a!ected by uncertainty in the global economy, particularly due to the Eurozone-crisis, and the e!ect of this has been exacer-bated by slowing GDP growth in the emerging markets and by virtually

non-existent growth in the devel-oped markets. However, looking forward, the core conditions for a new wave of M&A activity still re-main in the background and could come to the fore should current un-certainty abate. 

The cautiously-optimistic out-look pertaining to 2012 M&A activ-ity failed to materialise as attractive target valuations and large corpo-rate cash reserves were outweighed by continued uncertainty sur-rounding the European debt crisis and weak global economic perfor-mance, with corporates reluctant to execute deals without being able to make predictions on economic trends.

Nonetheless, there exists a set of underlying conditions which would suggest an upturn isn’t too far away. The tendency for M&A activity is to come in waves and research shows that a few factors are needed for such a wave to occur. Firstly, a shock, be it regulator-, technology- or de-mand-induced, disrupts the indus-try. The subsequent upheaval leaves some industry-players weaker than others, thereby creating a diver-

gence that allows the stronger firms to consolidate by merging or acquir-ing the weaker market participants. For this to take place, however, high levels of corporate savings or eas-ily accessible credit must available for a large M&A wave to take place. Current conditions are aligned in such a way that it would imply an upcoming wave. Beyond the multi-ple shocks that have occurred since 2008, cash and credit are also be-coming easier to obtain with large cash reserves on corporate balance sheets – S&P 500 companies’ com-bined cash totals reached nearly $1.1 trillion as of March 2012 – new lows on corporate bond-yields and improving lending conditions make an ideal environment for M&A. The macroeconomic implications of this would likely be positive overall. FROM A firm’s perspective, buying a rival provides instant capacity and

this is has been a key driver of cor-porate growth strategies in the re-cent past. While consolidation may not necessarily increase aggregate capacity in the industry, the tenden-cy is for consolidation among more e"cient players, leading to lower prices and raised output. In indus-tries that have already consolidated or that have exhausted economies of scale, the benefits may be derived from economies of scope instead. The key benefit of a new wave would be the curtailing of excessive corpo-rate saving and the reinvestment of untapped capital into the economy. Nevertheless, until such a time that corporates believe “uncertainty” has adequately diminished and the Eurozone problems are resolved, M&A is set to underperform.

The M&A doldrums - Waiting for the upturn

› As corporate bond yields decline financing deals becomes easier By Gary Finnerty

› Is a Greek exit the solution?

CAREERSTHE BULL 24.10.201210

Q: What can you tell me about your background?

I studied Law for 5 years of (in-cluding a “Master,” it might seems that I am specialized in a certain field of Law. However, that isn’t the case. After your “Master” you’re a generalist and you can have access to the bar after those 5 years only). So it’s called a Master but it is actu-ally a long undergrad (hope you got that!)

Q: Certainly insightful. What can you tell readers about your internship?

It was a one year internship: I worked in IT. I developed a startup, and used programmers in Pune and Shanghai

Q: Excellent. And what course did you specialize in?

I Did a Masters in Finance in TCD.

Q: 5 Years of Law and 1 year of Finance? That must taken quite a long time

Haha, it took 7 years to complete: I know, It’s a lot compared to UK profiles; however as I said earlier, anyone who studies a proper de-gree will need to do 5 years plus an additional one on top of that if that person wants a specialized masters. In my opinion, this long education system is a weakness when we com-pared our situation with UK/Irish fellows who are ready to begin their careers at 22

Q: Some pearls of wisdom right there. Can you give more specific details about your in-ternship?

I’m currently working in IBD and M&A in a leading Belgian fi-nancial institution. Clients come to us exclusively from the Benelux region. Teams are small in the M&A department, normally consisting of about 30 people. The Wealth Man-

agement division is huge. It has roughly 1000 people in 3 di!erent countries.

Q: What do you do as an Cor-porate Finance Intern?

Same job as an analyst really; the only di!erence being that every piece of work must be verified by a senior colleague, while analysts can send things to clients directly.

Q: Tell us about your typical Day.

My day to day task is to support managers who are attempting to close hot deals. It’s impressive to see how much experienced people can deliver in one day!

Q:Do you do much work with companies?

I do a LOT of pitchbook, where I suggest potential targets to compa-nies. Those presentations must be rigorously done in Power Point in order to make sure that the finan-cials I computed are correct and that the information provided is accurate. Secondly, lot of people un-derestimate the importance of good visuals, which are very important in this aspect working. Believe it or not, this part of the pitch is actually proper marketing.

I also do a lot of Valuation: I cre-ate Comparable Comp and DCF models in Excel. I adjust those mod-els for the company that I am work-ing on, the industry, the growth and the size. I particularly like this part since it is intellectually challeng-ing and you learn a lot about how to read a company financial state-ment. A big part of my job is also to find information using di!er-ent types of databases, Bloomberg, Mergermarket, Thomson Reuthers, Capital IQ.

Q: What else can you tell us about Corporate Finance?

Corporate Finance is wider than

just M&A; it also includes things such as bond issues project, where you also focus on companies analy-sis.

Q: Are there many myths about the job?

The “Financial Modeling & Ex-cel Wizard” that a lot of people talk about is completely overrated. Interviews sometimes stress a lot about those very quantitative as-pect of the job. Di!erent models are used in to value a company, but as soon as you know them, you create Excel templates that you will even-tually adapt to another company... but that’s it. There is no such things as quantitative guys modeling on Excel the whole day. In addition the valuation is a very small part of a project and the sales process. I think a lot of people exaggerate this technical aspect of the job.

Q: What do you enjoy about the job?

It’s one of the few jobs where you are actually intellectually chal-lenged. When you work with indus-tries you don’t know much about your clients or their expectations.

The business knowledge you get is enormous and incredible. You compile di!erent market studies every week. In addition in the sell-ing side, you draft full documents with your clients which explains to the potential buyers their entire business processes, operations, strategies, etc. This part is gold. I re-ally enjoy this part!

Q: What would you consider the most important of placing a value on a company?

The most important part of the valuation is to project the cash flow of the company in the future and assume a growth rate. This part is what will actually determine the intrinsic value of the company. You

make this projection based on a business plan, that you draft with the client-it’s actually business!

Q: Many may find the tech-nical part very daunting. What would you say to them?

It’s not just a technical job. You do a lot of things. When you want to close a deal there’s a very important negotiation and human relations part. There are certain parts of the job that are highly technical, but it’s such a diverse industry that there’s something there for people of all backgrounds.

Q: What appeals to you most about the job?

It’s fast moving and has a very dynamic atmosphere.

Q: What do you dislike about the job?

The Long hours...

Q: Please describe your back-ground and your experience this summer.

A: Well, I’m a third year BESS student studying Business and Economics, and I spent my sum-mer on internship in Deloitte in Dublin. It was a 12 week rotation program where I had the opportu-nity to spend 6 weeks in Manage-ment Consulting and 6 weeks in Audit. The experience was fantastic and gave me a great insight into the work and level expected from a first year trainee.

Q: What was your motivation to do this internship and how did you go about securing one?

A: I was unsure about what I wanted to pursue as a career, and was very put o! by the fact that most of the big companies I spoke to only took penultimate students for internships, as I wanted earlier experience to gain insight and start making future decisions. Deloitte was open to any student applying for their summer internships so naturally I decided to give it a shot.

The application process online is quite straightforward, although I would say to students interested to allow yourself time to think through the questions and not leave it to the last minute as you want to be 100% happy with the answers as it goes on file and can stand as a strength or a weakness if you go for a graduate position later on.

Q: What was the typical in-ternship day like?

A: Consulting was very di!erent to Audit. As it was the quiet season for Audit it was a bit more relaxed, 9-5.15 with the option of a half day Friday if you had worked up your hours during the week.   Consult-ing was technically 9 till 5.15 eve-ryday but as it was all project based work the day was generally longer. I worked on various di!erent pro-jects; some were only at the begin-ning stages where I would have to research the clients company and industry trends and put together a summary paper for partners and senior managers, other times I played a supportive role and spent

time editing excel spreadsheets or proofing proposals, mainly all the type of tasks you are asked to do in your first year of training after grad-uation.

Q: Could you explain the group you were in and how it dif-fered from others?

A: I was part of the financial ser-vices team in Audit, and the only main di!erence is the types of cli-ents in Audit. I was part of the CFO services team in Management Con-sulting. This area provided various services for CFO’s from a range of di!erent companies and industries and dealt with any problem or is-sue a CFO came to us with, I also supported on the Deloitte quarterly CFO survey which questions CFOs about their business position and strength. Other areas in consult-ing focused on the implementation of di!erent technologies e.g. SAP, and others areas are focused on the strategy and operations element to businesses.

Q: I understand that you were o!ered a full-time position at the

end of your in-ternship. What advice would you give to aspir-ing Consultants?

A: Get as much in-sight as you can as early as possible. I knew what my skills were and knew I wanted project based work that was continuously chang-ing and challenging me in di!erent areas, however, I certainly didn’t know where I would find the right fit. Also, don’t settle. If you think you are more skilled for a particu-lar place/career, then make sure you do everything you can to get it. Most companies, certainly Deloitte, respect that you are driven and aren’t afraid to push for what you think suits you. It will stand to you in any field. Lastly, keep your ear out for every opportunity you can, there are tons of talks, open eve-nings, and stands in college. Sign up and go to them, they give you a great idea of what is really needed to suc-ceed and what companies expect of you after graduation.

M&A o!-cycle internship in BrusselsDiego Riera Diaz gives his account of working in M&A

Consulting and Audit summer internship

An interesting dual summer internship is described by Aideen Fennell

11CAREERS THE BULL 24.10.2012

Q: First of all, please tell us a little about your background and your summer.

A: I’m final year Economics as part of the B.E.S.S. course here in Trinity and over the summer I com-pleted an internship with Deloitte Dublin. I was based in the Financial Services [FS] section of the Audit department but also spent a month working on a joint FS – Corporate Finance [CF] project and shortly af-ter leaving I was o!ered a contract starting Autumn 2013.

Q: What motivated you to pursue a career in Audit and

how did you go about it?A: My pursuit of a ca-reer in Audit came about

very much by accident. You’re greatly lim-

ited with the Big Four. My first

preference had been CF with

Audit com-ing in close

s e c o n d and so

when I got the phone-call of-

fering m e a n i n -t e r -v i e w f o r A u -

dit I took it

without hesitation. Given that it hadn’t been my first choice

I then had to do some additional re-search on the field – research which, I guess, ultimately got me the in-ternship.

Q: Describe your typical day at Deloitte.

A: A pre-work run usually meant getting to the o"ce at around 8:45am. This gave me time to check my emails and catch up on what was happening in the world before work which helped keep me up to date with market news. For instance if your client happened to be on the news some morning there was a pretty good chance it would impact your day.

Over the course of the summer I worked primarily with three dif-ferent clients and each one, while similar in some respects involved a di!erent daily routine.

Q: Could you explain the dif-ferences between the di!erent sections of Audit and which you prefer?

A: The two main areas of audit are Consumer and Technology Busi-ness [CTB] and Financial Services. Financial services deals with the audits and regulatory accounting requirements of Banks, Investment Funds and Special Purpose Vehicles etc. FS would also deal with any oth-er projects these clients would like to run, usually in conjunction with Deloitte’s consulting arm.

CTB is often considered the more fun side of audit – or at least the more diverse side. Whereas in FS you’re primarily based in the of-fice, excluding the odd trip to Lon-don or the IFSC, in CTB you’re do-

ing practical audits. What do I mean by this? Well I mean that you can be doing everything from basing your-self in some mobile operators HQ to counting boxes in a factory in Kerry.

Deloitte also o!ered internships in CF and Consulting. These are much smaller teams than CTB or FS would be and as such you get much more responsibility and client in-teraction from an earlier stage.

Personally for me I had chosen FS above CTB and I am more than happy I made that choice.

Q: What advice have you to give?

That all depends on what year you’re in reading this. For any Bull readers in Second year my advice is simple - get involved [write for The Bull!]. In all seriousness though, while academics are important, un-less you do something someone else doesn’t, have relevant team experi-ence or already contribute in some way to the field you intend to work your C.V will drop to the bottom of a very big pile of other applicants. From three years of applications, interviews and work experience I can honestly tell you that prospec-tive employers start at the bottom of your C.V. with your hobbies and interests, work their way up to your experience and then if they decide they like you and that you’re some-one they could potentially work with in the future they’ll have a look at your grades.

For those in Junior Sophistor you will hopefully already have something on your C.V. if not you still have time as most internship applications won’t close until De-cember or January and some go as

late as February. Almost all firms hire on a rolling bases so don’t leave it until the last day. I’ve heard firms promise they don’t look at applica-tions until after the deadline has passed only to receive a call a week before the closing date o!ering me an interview. I would also advise ap-plying for as many internships as possible.

For my fellow Senior Sophistors the milkrounds have just closed and most other graduate posi-tion applications will close in the coming weeks. It’s still important for your C.V. to stand out so if you haven’t been that involved in Col-lege life over the past three years think back to what you’ve done that shows skills your desired career would look for and emphaise those in both your C.V. and your cover let-ter. Research in depth the area and the company you have the interview with, most of the information you learn will be completely irrelevant in the interview, but it gives you an air of confidence that may prove vi-tal.

Lastly my internship with De-loitte gave me an insight into some-thing I hadn’t before thought about but which I feel is important to take into your career choice. A degree today will not make you stand out. With 70%-80% of students going to third level a level 8 degree no longer gives you the edge it once did. While you would still hope a degree from an institute such as Trinity is an advantage, a masters and a profes-sional qualification such as the ones provided through a lot of graduate training programmes are hugely important.

Q:Hi Bish-oy. What can

you tell me about your internship?

Well, believe it or not, I was based in a

small engineering start-up all the way in San Francisco, Califor-nia! The company, called Prototank, deals in hardware prototyping and product development. Despite only having two years of engieering ex-perience, I posessed the requisite knowledge and skills to perform successfully in the internship.

Q: That certainly sounds in-teresting. Describe your daily routine?

Unsurprisingly, this wasn’t your typical job. I arrived in every morning at 10 am. At this point I was briefed by my boss who would set out my tasks for the day. This could range from building robots to writing up instructibles online (instructibles.com) to helping to or-ganise large corporate events. This was aided by the 3-D printer and la-

ser cutter in the firm’s o"ces, which aided productivity greatly.

Q: Your range of tasks were certainly eclectic. How did this firm come into being?

The firm sprung from a highly innovative concept – Super Mario lamps. It sounds incredibly simple, but all great ideas are. After this product took the market by storm, they gradually began to expand their operations. They placed an enormous emphasis on improving existing products and producing new hardware devices. The con-stant drive of the sta! and ambition of the sta! was what kept me so mo-tivated.

Q: Was there anything unu-sual about the firm?

Believe it or not, though it’s an engineering firm, none of the mem-bers had any engineering qualifica-tions! These guys came out of col-lege with Arts Degrees, completey unrelated to engineering, but over the years they developed engineer-ing principles and theories, and

began to develop an interest in de-veloping and improving technology.

Q: So, was there anything about the firm that you either liked or disliked?

Firstly, it was an unpaid intern-ship. Because the company was still in its embryonic phases, it was very di"cult for them to provide me with a wage. On the other hand, I was paid for partaking in the big-ger corporate events; namely coor-dinating and leading team-building exercises.

Q: So, there were certainly pros and cons associated with your internship. How, precisely, did you get your intership?

Applying for internships was the bane of my life during second year. I began applying for them in September, but with very little suc-cess. Believe it or not, I only got my internship completely by chance: I was working in a mechanical work-shop in California, when a member of sta! noticed that I was working on developing a prototype of the

Ironman suit. He explained what the firm he worked for did and he encouraged me to apply. I took his advice, hence why I’m speaking to you about my internship today.

Q: That’s certainly an im-pressive feat for anybody – Well done. Can you give any advice to those currently applying for in-terships?

It sounds cliched, but work hard and don’t give up. Searching for internships can often be very dis-heartening and incredibly stressful. I’m certain that the right internship program is out there for everybody, all you need to do is search hard enough.

For example, my management pursued a goal that seemed beyond reach to them at one point in time (after they left college with Arts Degrees), but they continued to pursue their goals. I’d encourage all readers to follow their lead - if you work hard enough, you’ll succeed.

Audit summer internship

Internship in Silicon Valley

Damien Carr provides an account of his internship in Deloitte Audit

Bishoy Abdou recounts a summer spent in San Francisco

ECONOMYTHE BULL 24.10.201212

THE NATION’S GROWTH IS SLOW AND

FEEBLE

WITH THE European cover of Time magazine hailing the ‘Celtic Comeback’, the triumphant Taoi-seach now seeks the praise of his European counterparts. Many be-lieve that Ireland is finally return-ing to growth and losing its a"lia-tion with Europe’s troubled south. As the Kerry group announces 900 new jobs, the nation is brimming with optimism for a brighter future. For many, amidst the increasingly upbeat tones, the importance of Irish tax competitiveness has been forgotten as a fundamental driver of growth in the economy. More signs of encouragement can be taken from Ireland’s shift from the specu-lative property sector towards real growth.

Foreign firms are vital for the Irish economy. A reading of The Irish U.S Economic Relationship 2012 highlights the continuing em-phasis placed by multinationals on the need to retain our competitive corporate tax regime. The report, published by the American Cham-ber of Commerce Ireland, states “Ireland’s favourable corporate tax

rate remains highly attractive to US multinationals, although lower corporate taxes are becoming more common among states bent on at-tracting the attention and capital of multinationals.”

What becomes evident from some basic research into the na-ture of paying tax in Europe is that what companies actually pay to the tax authorities is often a very dif-ferent amount than nominal tax rates would suggest. Google’s Irish operation perfectly illustrates this

case. Last year the firm’s operations here generated €9Bn in gross profit and paid only €8M in tax. Given that Ireland’s corporation tax rate is still in the double digits, the rev-elation that a major firm such as Google pays only €1 for every €1000 in gross profit to the Revenue Com-missioners is surprising. It raises the prospect that Ireland might be an appealing place to do business less because of the low corporate tax rate and more because of how easy it is to avoid.

While disillusionment with the e!ectiveness Irish tax policy is no doubt justifiable, the case for maintaining Ireland’s low tax rate becomes stronger when taken in a European context. In a World Bank-PWC report on European tax policy, it was found that the long-held per-ception of Ireland as some form of tax haven is largely unfounded. When one passes by the nomi-nal corporate tax level, and looks beyond to the final real company tax, Finland comes out just above Ireland’s 11.9% at 15.9%, France at 8.2% and Belgium at 4.8%. Given this trend, the misgivings about Ire-land’s corporate tax rate appear to be entirely unjustified.

Pressures are again mounting

from the powers to review our tax structures and join a European ef-fort towards tax harmonisation. The newly formed European Power Elite (Von Rompuy, Manuel Ba-rosso, Juncker, Draghi), are intent on introducing proposals to be rati-fied early next year in a report called Towards a Genuine Economic and Monetary Union. Facing terms of credit dictated not by market forc-

es, but by Troika, the government may soon find itself between a rock and a hard place. Deciding between retaining our trademark business-friendly tax regime and a burden-some interest rate on our credit injections from abroad might mean disaster as multinationals uproot and leave, or Irish citizens are bur-dened by yet another exorbitant tax increase.

Doing business in Ireland: Spotlight on corporation tax

With exports falling, the debt burden rising even higher and pub-lic morale at record lows, Britain seems to be in an inexorable state of decline. Few are sanguine about the nation’s prospects. The usually up-beat David Kern, Chief Economist at the British Chamber of Com-merce, called the UK’s economic performance both “weak and inad-equate”. Even o"cial figures appear to be against Britain. During the last three quarters, HM Treasury estimated that GDP fell by 1.3%. In

addition, Britain’s total economic output is only modestly higher than when the Tories initially took o"ce in the Summer of 2010, prompting the International Monetary Fund to downgrade its growth forecasts for the UK.

Yet delving beneath the surface

of underperformance and hope-lessness, Britain’s economy shows many underlying strengths that are highly encouraging to the casual po-litical observer.

Though the IMF forecasts that the UK’s economy will shrink by 0.4% this year, there indications of growth. Inflation is falling, output is rising and the job market is proving surprisingly resilient.

Retail sales have risen sharply during the year, particularly on du-rable goods, while new car registra-tions are up 1.3%. This contrasts fa-vourably with 2011, when tax hikes and rising inflation depressed con-sumer sentiment. Thankfully, the government’s tax increases were front-loaded in 2011, meaning that further increases are likely to be modest and have a less detrimental e!ect on the economy.

Any naive observer would squawk at the current rate of unem-ployment of 8.1%. This is the nor-mal reaction during ordinary times. In 2008 the unemployment rate stood at 5.3%. However, these are far from ordinary times. When com-pared with the European average, Britain’s employment figures ap-pear incredibly buoyant. Moreover, Britain’s rate has declined because many of the previously unemployed are beginning to find work again, not because workers are dropping out of the labour force - as is the case in America. Sceptics may attempt to refute these figures by pointing out that many of the newly employed are finding only part-time work or

are entering jobs that they’re un-suited for, thus preventing firms from truly harnessing their skills. Yet historical precedence teaches

us that this is normal when an econ-omy is beginning to emerge from a severe recession.

David Cameron’s policy of rebal-ancing the economy in favor of the private sector is also coming into

fruition. 700,000 net private sector jobs have been created in the pri-vate sector, more than compensat-ing for the job losses in the public sector.

Fortune has rewarded the Tories for the bold moves they have made vis-a-vis the economy. Business sur-veys continuously show more signs of confidence than you’d normally find in an economy that has con-tracted as much as Britain’s has. The lead that the Labour Party currently commands over the Conservatives may very well be attributable to the Party’s Conference earlier this month. Labour’s leader, Ed Mili-band, displayed further signs of poor stewardship and socialist na-

ivete during his speech, which was long on compassion and solidarity, but failed to mention the word ‘defi-cit’ once during its 65-minute span. Though applauded by a rapturous media in its aftermath, he failed to address Britain’s greatest challenge.

The nation’s growth is slow and feeble, China’s growth is slowing, and Europe continues to be caught in the economic doldrums. In spite of this, however, Britain’s underly-ing strengths are more apparent by the day. With employment ris-ing, inflation declining and output increasing, the future is looking bright for the UK.

The hidden strengths of the UK economy

PRESSURES ARE AGAIN

MOUNTING FROM THE POWERS TO REVIEW OUR TAX

STRUCTURES, AND JOIN A EUROPEAN

EFFORT

Ireland benefits significantly from its low corporate tax rate, writes David Lally

BRITAIN’S ECONOMY

SHOWS MANY UNDERLYING STRENGTHS

THAT ARE HIGHLY

ENCOURAGING TO THE CASUAL

OBSERVER

By Cathal O’Domhnallain

› The IFSC is largely a product of Ireland’s favourable tax regime

13ECONOMY-DEBTTHE BULL 24.10.2012

THE FED IS PURSUING

EXPANSIONARY POLICIES

A KEY feature of the Great Reces-sion has been the alarming increase in the indebtedness of countries around the world. Of particular con-cern are those countries that have breached the crucial debt-to-GDP ratio of 100%. While all agree that the reduction of this burden should be addressed as a matter of priority, there is some debate about the poli-cies that should be implemented to achieve this.

Lessons can be drawn from a re-cent IMF report published in their World Economic Outlook. Data gathered between 1875 and 1997 was analysed to identify 26 episodes during which the debt-to-GDP ratio

of advanced economies breached the 100% threshold, and the out-comes of the policies implemented over the subsequent 15 years was re-corded. Important lessons can still be drawn from the consideration of

the examined countries.The United Kingdom’s experi-

ence in the aftermath of WWI, for example, serves as a cautionary tale against combining tight fiscal and monetary policies. The public debt had reached 140% of GDP and prices were double pre-war levels. The government of the time imple-mented severe fiscal austerity to redress the public finances, while high nominal interest rates were also introduced to return to the gold standard. Though the country recorded a primary budget surplus of 7% throughout the 1920s, growth was stunted by the extraordinarily high real interest rates that arose during this period of deflation lead-ing to ever-increasing debt levels, taking Britain on the verge of bank-ruptcy.

Japan’s debt problem arose in the 1990s primarily as a result of the bursting of stock market and real estate bubbles, which created weakness in the financial sector and the economy as a whole. The Bank of Japan found itself constrained by the zero percent lower bound to nominal interest rates and weak-ened transmission of monetary policy due to structural flaws in

the banking sector. Interest rates were raised prematurely and fiscal stimulus was attempted, neither of which eased the burden of debt or redressed the public finances.

It was only when structural weaknesses in the financial sector were addressed, through bank re-

capitalisation and writing down bad loans, that quantitative easing was successfully introduced. Helped along by a depreciating exchange rate and favourable external envi-ronment, the debt-to-GDP ratio stabilised at 185%.

This point is reinforced by con-sidering the policies pursued by the US following WWII, in circum-stances very similar to those facing the UK as described above. Though they also moved their primary budget from deficit to surplus, the monetary policy pursued was decid-edly more expansionary. Influenced by the Keynesian revolution at the time, and fearing deflation more

than inflation, the Federal Reserve kept interest rates low by main-taining a cap on government bond yields. This encouraged investment and led to high inflation which re-duced the debt-to-GDP ratio by al-most 35%, while strong growth and primary budget surpluses cut an ad-ditional 2% per annum.

A few broad lessons can be drawn from these and other cases. Firstly, fiscal consolidation should only be attempted once an appropriate monetary policy is in place. The con-trasting outcomes of the British and American policies are particularly supportive of this lesson. Unless austerity is accompanied by meas-ures encouraging growth, the policy will be self-defeating. This must be coupled with a well-functioning banking system so that policy deci-sions are e!ectively transmitted. While it is arguable that this is cur-rently the case in the US, where the Fed is pursuing expansionary poli-cies and weaknesses in the financial sector have largely been addressed, it is less clear in the case of the Eu-ropean periphery. Caution must be exercised, therefore, when pursuing fiscal adjustments in this context.

Secondly, it is important that any fiscal consolidation takes the form of permanent rather than temporary measures. This was par-

ticularly evident in the reforms in-troduced by Belgium and Canada in the 1980s, as was the importance of a supportive external environment. It is unlikely that such an environ-ment will present itself in the near future, as slow growth and con-tractionary policies are pervasive around the world.

Perhaps the most sobering find-ing was the length of time required to reduce the public debt. Belgium achieved the greatest peacetime improvement in its budget balance, but it still took a decade to move from a 7% deficit to a 4% surplus.

While it seems that the Euro-

pean periphery will struggle to ease its debt burden in the face of slow global growth and the costs of do-mestic deflation, it seems that there is still hope that sharp fiscal consoli-dation can be pursued in a support-ive monetary environment. History suggests, however, that the latter is a prerequisite of success in the for-mer, and highlights the importance of the ECB in navigating a safe path through this crisis.

Reducing the public debt: Lessons from history

FISCAL CONSOLIDATION

CAN BE PURSUED

Sean Tong warns of the dangers of repeating historical mistakes when framing economic policy.

WEAKNESSES IN THE FINANCIAL SECTOR HAVE

LARGELY BEEN ADDRESSED

With the United States teeter-ing on the brink of the “Fiscal Cli!”, enacting a plan to bring the crush-ing debt of the US under control seems essential. As its national debt as a proportion of GDP is beginning to reach unsustainable levels, the Federal Government needs to re-duce the deficit, whilst not sapping growth. It needs a comprehensive tax reform that will close loopholes, while at the same time simplify-ing the tax code. The programme

needs to be amenable to both par-ties, with revenue enhancers and sharp spending cuts and struc-tural reforms. A “Grand Bargain” is required to avert sequestration - a programme of spending cuts and tax increases due to come into e!ect on January 1.

How did the United States get into this predicament? When the economy was booming in January 2001, the Congressional Budget Of-fice projected that the Federal Gov-ernment would run a budget sur-plus of $3.5 trillion through 2008 if the policies of that time remained

unchanged. Alas, when that time came the national debt was begin-ning to skyrocket due to enormous deficits. How did this happen? The answer is simple. Two unfunded wars and a prescription medication programme, coupled with two tax cuts, lead to exploding deficits.

The Republican Party believes that tax cuts stimulate the economy whenever prescribed. This belief is predicated on the belief that indi-viduals, when left to their own ac-cord, are capable of spending their money more rationally than the government. In turn, they invest their money into the economy lead-ing to a higher revenue due to more robust growth.

The history of the nineties, however, proves that this isn’t al-ways the case. In 1993 Bill Clinton introduced a big tax increase that every Republican in Congress voted against. Yet the economy boomed. It grew at a rate of 4.1% that year, and continued to grow strongly during his Presidency. Spending restraints were also introduced through Paygo rules, meaning that taxes could not be cut unless o!set by spending cuts. This created the stability for prolonged growth.

George W. Bush’s tax cuts in 2001 and 2003, on the other hand, had the opposite e!ect on the fiscal situ-ation. The economy continued to languish after the 2001 recession as the Treasury began to haemorrhage revenue, which fell to 17.5% of GDP

in 2008 from 20.6% in 2000. CBO figures show that when the Bush Presidency ended that tax cuts cost the Federal government $1.6 tril-lion, while slower-than-expected growth further reduced revenues by $1.4 trillion.

There are important lessons to be drawn from this episode of US history. Tax cuts don’t always suc-ceed in stimulating the economy as Reagan’s Tax Reform Act of 1986 did. There’s absolutely no guaran-tee that Paul Ryan’s plan of cutting rates to 20% and 28% will enhance revenues. The Bush experience shows us that they can have the ef-fect of perpetuating the cycle of debt. His plan is a product of Repub-lican insouciance on debt. While

he has set some targets, he fails to outline which programs he would cut and which loopholes he would close.

The Bowles-Simpson report, on the other hand, makes very specific proposals on how the target of cut-ting federal debt by $4 trillion over 10 years is achievable. This plan reduces marginal rates of taxation and specifies the popular loopholes that would be closed. Mortgage interest would no longer be tax deductible, while rates on capital gains would fall in line with income taxes - codifying the ‘Bu!et Rule’. Another source of revenue would be the 15-cent-per-gallon increase in the federal gas tax alongside a steep reduction in discretionary expendi-

ture. The tragedy of this situation is

that neither party has chosen to embrace the findings of the pro-posal. House Republicans chose to ratify the Ryan plan as a blueprint for future fiscal policy, while Obama distanced himself from its findings in spite of having commissioned it. This is likely to prolong uncertainty about the capacity of the Federal Government to service its debts.

Both parties need to make every e!ort to break this gridlock. Obama must stand behind the proposal to prove that he’s the change you can believe in, while the Republicans need to end their cognitive disso-nance on debt.

On the brink

A “GRAND BARGAIN” IS

REQUIRED TO AVERT

SEQUESTRATION

› The IFSC is largely a product of Ireland’s favourable tax regime

By Cathal O’Domhnallain

POLITICSTHE BULL 24.10.201214

‘One unit of currency, one vote’

CHINA’S ECONOMIC perfor-mance over the last three decades has been nothing short of impres-sive. GDP growth averaged 10 per cent a year and over 500 million people were lifted out of poverty. It could be argued government inter-vention in the Chinese economy has been a catalyst of this growth. In-vestment in cheap city housing for rural migrant workers, controlled

interest rates, a pegged currency and the prioritisation of capital in-tensive growth over labour-inten-sive growth have all been features of China’s stunning economic rise.

China’s economic course changed following the global fi-

nancial crisis of 2008. Europe and America are the biggest buyers of Chinese products and their travails have plunged many manufacturers into despair. In 2008, approximate-ly 20 million migrant jobs were lost. Although China stemmed the a!ects of the crisis through a 4 tril-lion yuan stimulus programme, the overall consequences of the crash are clearly seen through the anger and protests of the Chinese labour force.

Last November thousands of employees at a shoe factory in Dongguan took to the streets in protest against salary cuts and sack-ings. Protestors overturned cars and clashed with police. Residents of Wukan in Guangdong drove out party hacks and police a month later in response to the seizure of agricul-tural land by local o"cials. The vil-lagers gave up their protest on De-cember 21st after a rare, high profile intervention by the Guangdong party leadership, which promised to look into their complaints. These sorts of events have been common

in China since the crash and have contributed to the main mouth-piece of the party in Beijing con-cluding, remarkably, that it needs to stop treating citizens as adversaries.

Labour market disturbances, as well as a slowdown in econom-ic growth, have encouraged the establishment of a new growth programme called “China 2030”, which was launched by a govern-ment commission in conjunction with the World Bank. The report

urges China’s government to stop meddling in the market and has suggested ways to increase private consumption in the economy. The authors are confident that China is on its way to becoming the world’s biggest economy and a high-income country if the criteria are met. The Chinese government seem to have acknowledged the merits of the programme and can be seen to be embracing a change in economic direction if one looks at recent de-

velopments. The People’s Bank of China

(PBOC) earlier this year released a potential timetable for easing Chi-

na’s extensive capital controls over the next ten years. China’s trade imbalance is reducing back toward normality. Jobs are being created in the interior parts of the nation. Recent figures show retail sales rose 14.4%, accelerating from the 14.1% rate for the first half of the year. All of this points toward a liberalisa-tion of the economy. If China gets through its 18th party congress this November unscathed and contin-ues to gradually open its economy, one can expect the dragon to soar to the highest peak of the global eco-nomic order in the not so distant future.

China’s new economic direction By James Nugent

LABOUR MARKET DISTURBANCES... ENCOURAGED... A NEW GROWTH

PROGRAMME

THIS POINTS TOWARD A

LIBERALISATION OF THE

ECONOMY

EARLIER THIS year, formal re-cords were released under the Free-dom of Information Act which re-vealed the intertwined relationship between the Irish Government and the Irish Financial Services Cen-tre (IFSC). These records become known to the general public on Monday October 8th in an article by The Irish Times. The relation-ship between the two parties has been, and continues to be, played out within the IFSC Clearing House Group, a lobbying group, chaired by Martin Fraser, the secretary general of Government. The group compris-es of civil servants from state agen-cies like the IDA and Enterprise Ireland, as well as representatives from the principle financial corpo-rations in the country; JP Morgan, Citigroup, State Street, Barclays, KPMG, Bank of America, Bank of Ireland, among others. Meetings between the two parties take place in Government Buildings, so it is no surprise that Government policy bears striking resemblance to the Group’s position in two related ar-eas: tax incentives for the financial industry and the stance on the EU’s proposal of a European-wide finan-cial transactions tax (FTT).

Not only did the Government’s position exactly match that of the financial industry’s lobbyists, but there is no evidence that they con-sulted any other representative group in Irish society before hold-

ing a final view. It follows quite nat-urally then that the Government is opposed to the implementation of a FTT and that “a total of 21 changes to the Finance Act were made to ac-commodate the sector including a contentious incentive that allowed foreign executives with companies based in Ireland to pay tax on only 70 per cent of income between €75,000 and €500,000”. In our ‘democracy’ it thus seems that the quantity of currency in one’s pocket has replaced the passport as the legitimate means to participate in public policy decisions.

But this perversion of democ-racy is not unique to Ireland. In Washington DC, the interests of the financial sector are thoroughly rep-resented by the Financial Services Roundtable, a lobby group employ-ing 3,000 lobbyists; which is more than five lobbyists for each member of the US Congress. Charles Fer-

guson, in his award-winning docu-mentary Inside Job, reveals that financial corporations spent over $5 billion in lobbying and campaign contributions from 1998 to 2008. Since the crisis the Financial Ser-vices Roundtable are spending even more money trying to fight reforms like the FTT.

Likewise, the City of London, amply represented in David Cam-eron’s government, has vetoed the proposal of a FTT or comparable financial controls. The City, being Europe’s most important financial centre, can a!ord the votes that grant it veto power. In addition, ex-financiers from major investment banks, like Morgan Stanley, UBS and HSBC, occupy key positions in Cameron’s government. James Meyer Sassoon, who was former vice-president of UBS, is one exam-ple.

Lithuania provides a further il-lustration. After the crisis of 2008 struck, the Lithuanian government had to choose between removing its peg with the Euro, damaging the balance sheets of Swedish banks that previously flooded the country with credit, or choose an internal

devaluation; in other words cutting wages and the public sector budget in general. Lithuania chose the lat-ter option. Since then it is known that the two Lithuanian ministers heavily involved in that decision both held prior employments with Swedish banks.

The ‘Great Recession’ that en-sued in 2008, primarily from the activities of the financial industry in the preceding years, has actually strengthened the political hand of the financial sector. Since 2010, at least 10 of the 27 EU governments have appointed ex-bankers or fund managers to positions in their re-spective ministries of finance or central banks. In Italy and Greece, two unelected technocrats were brought into power in 2011. In that year also, President Obama ap-pointed Gene Sperling, a former ad-visor to Goldman Sachs, to lead the National Economic Council.

The governments of four of the five biggest European economies (UK, France, Italy, and Spain) that governed in the years prior to 2008 have been, since the crisis, removed by their respective electorates. However, there has been no change

in the governance of four of the most powerful financial firms in the world. Even though Goldman Sachs was fined $550 million for engaging in fraudulent activities prior to the downturn, Lloyd Blankfein con-tinues to be the bank’s CEO. Jamie Dimon continues to preside over JP Morgan, Brian Moynihan over Bank of America and (until very recently) Vikram Pandit over Citigroup; all key players in the lead up to the cri-sis.

Does this not constitute an im-position by the financial sector on Western democracy? There is a mainstream belief that austerity policies are a remedy for the irre-sponsible management of public fi-nances by governments in the past. This makes us forget that, with the exception of Greece, public finances have been drastically degraded due to the crisis in the financial sector; the same sector whose representa-tives have been promoted to direct Government economic policy on both sides of the Atlantic. The sub-sequent ‘reforms’, or lack thereof, speak for themselves and for the state of our democracies.

› Lloyd Blankfein, CEO of Goldman Sachs, has survived the financial crisis

By Marc Morgan

DOES THIS NOT CONSTITUTE AN IMPOSITION BY THE FINANCIAL

SECTOR ON WESTERN

DEMOCRACY?

› Foxconn is one of the manufacturers propelling China’s economy

15POLITICS THE BULL 24.10.2012

SO THE EU won the Nobel Prize. And everyone complained. For these bemoaners, 70 years of Eu-ropean peace, harmony, prosperity and growth unprecedented since...well, ever, is unworthy of recogni-tion. Everything has been ques-tioned, from the right of the Nor-wegian committee to grant it solely to an institution as opposed to an institution and a representative in-dividual, which has previously been common practice, to the timing and the appropriateness.

We, the constituents of the mod-ern mob are all too ready to forget previous benefits in the face of new challenges. The burdens placed upon us are the fault of our domes-tic government and not of the EU. Our national debt is somewhere in the region of €136 Billion, and were it not for the intervention of the EU one can be sure that we would be a failed state.

Europe has been in a state of more or less constant warfare since even before the founding of the Ro-man Republic. Historians such as Niall Ferguson have argued that the patchwork of warring nation-states that have peppered the face of the European continent since 476 AD created a system of compe-tition, which fostered innovation, expansion and wealth. It is also true, however, that this diversity produced conflict, and this conflict produced hardship for generation after generation of our ancestors in purely human (material and emo-tional) terms. It had reached a point by 1914 that Europe had developed into factions of super-states, walk-ing the line of direct conflict.

From 1900-1945 almost 100 Mil-lion lives had been lost due to war. The economies of Europe’s power-houses were ruined. The cataclysm of the Second World War led to the realisation among Europe’s leading statesmen that structural changes

were needed to ensure peace. And so the European project was born.

The EU, as it has become, has succeeded in opening dialogue be-tween its members, using economic co-operation to foster friendly rela-tions and prevent violent conflict. Peace has created security, security has created prosperity and pros-perity has created development. It successfully created a bu!er be-tween the powers of NATO and the USSR, preventing a Third World War, fostered democracy following the collapse of the latter regime and welcomed with open arms these new states, cementing their place as equal partners in the European project.

All very well and good, but what has the EU done for Ireland? Since membership, Ireland has been transformed from a superstitious agricultural country into one of the world’s leading centres of finance, scientific innovation and techno-logical advancement. We have pros-pered beyond our wildest hopes to the extent that we are consistently ranked one of the best countries in the world for quality of life, income and business-friendliness. The fi-nancial support of the Union has proved pivotal to all of this, building roads, subsidising agriculture and education and generally throwing money at whatever problem we had and getting it fixed. Perhaps more importantly, the EU has created a framework for dialogue with ‘the old enemy’, the United Kingdom. In 1973, it was inconceivable that there would be a time without bombs and bullets, or that the British Monarch would set foot on this Island, not as a ruler, but as a friend and an equal to lay a wreath in memorial of those who gave their lives to destroy eve-rything which she represents. What do we want from the EU if wealth, stability, and a lasting peace are not enough?

The Nobility of Peace

Friedrich August von Hayek (1899-1992) is perhaps the best known of the Austrian School of economic thought with his radical approach to free-market thinking, which involved governments inter-vening less than is seen in a free-market economy.

One would think that in today’s world, with constant financial un-

certainty, the spiraling debt crisis and increasing unemployment that mankind’s faith in the free-market has been shaken to its core. However, despite this there is now an increasing interest in Hayek’s theories. A large part of this is due to the propagandist review given to Hayek’s book “The Road to Serf-dom” by Glenn Beck a few years ago, which made the book a renewed best seller in the United States. Two comedic viral videos on YouTube, showing him in a rap battle with his archrival John Maynard Keynes, have also fuelled the public’s resur-gence of interest in Hayek.

In asking the relevance of Hayek today we should ask what he would think of the current situ-ation. Hayek would argue that the current financial crisis, as with all busts in the economy, sowed the seeds for its own downfall with the low interest rates and cheap avail-ability of credit, which caused the over-investment in the property sector. Of course, nowadays every economist is saying this. Hayek would argue that governments and central banks, such as the US Federal Reserve and the European Central Bank should not have set rates so low. If the market had been free to set its own rates, they would have been higher, which would have reduced excessive borrowing. This message is supported by influential Hayek advocates, such as Ron Paul.

Hayek would see the market as a kind of natural phenomenon, which had evolved over the period of human history constantly driv-ing civilisation forward. The market is an organic communication sys-tem processing information on all of our needs and desires. According to Hayek, the market is most pro-ductive when it is completely free and government interference only distorts market signals that are sent to buyers and sellers. This is clearly relevant to us today as government intervention does seem to be del-eterious.

Of course, what would be the

Hayekian answer to this economic mess? Hayek would argue that the economy would need a period of cleansing to clear the bad invest-ment in order to allow the strong-

est businesses to survive. However, it would seem di"cult to allow the

fittest to survive in this world of domino e!ect debt crises.

Therefore in asking the rel-evance of F.A. Hayek, mankind should seriously take into consid-eration his fear of economic booms and how we tend to habitually lay the foundations of our future eco-nomic downturns by leading the market down a yellow brick road. As for further liberalisation of the mar-ket and allowing it to self-cleanse, it would seem that most politicians would be unable to take that last step away from the economy and al-low it to function freely, without at least some governmental steering.

Matthew Taylor defends the decision to award the European Union with the Nobel Peace Prize

The relevance of F.A. Hayek

THE EUROPEAN CENTRAL BANK

SHOULD NOT HAVE SET RATES

SO LOW

WE TEND TO HABITUALLY

LAY THE FOUNDATIONS

OF OUR FUTURE ECONOMIC

DOWNTURNS

By BenRogers

› F.A. Hayek has had a lasting impact on economic thought

REVIEWTHE BULL 24.10.201216

If you want to write for

Email: recruitment@thebull.ie

Why is it that in the 1970’s less than 10% of Afri-cans lived in dire poverty

whereas today over 70% of sub-Saharan Africans live on less than $2 a day? This book argues that the direct bilateral aid that accounts for 90% of the aid given to Africa fuels corruption, makes democracy less likely, reduces local savings, causes inflation and makes African exports uncompetitive. Now, in this time of extreme economic upheaval, it is more pertinent than ever to ask whether this policy has been e!ec-tive.

Dambisa Moyo, an Oxford and Harvard educated Zambian is of the opinion that “foreign aid is not benign – it’s malignant”. She points to developmental aid’s e!ect on her native Zambia and notes that it was only once her homeland adopted a free-market, self-dependent ap-proach that any real ground was gained. This is not to say that all aid is bad, of course emergency and humanitarian aid are essential but they only account for 10% of the aid funds transferred to Africa. A top to bottom approach cannot, has not and is not working for Af-rica. It results in the continuance of poor governance and the conflict it engenders seriously threatens any chance Africa has at growth. It also massively disrupts local markets e!ectively destroying them and re-placing them with welfare.

Why have we adopted a develop-ment-aid policy in relation to Africa when it continues to yield no results and in some cases makes the situa-tion worse? According to Moyo, we must first take a closer look at the Marshall plan which rebuilt a war-torn Europe as it is the inspiration for the large-scale systematic cash transfers that are at the root of the African problem. The Marshall plan was di!erent in two distinct ways; first, it was for a specified time pe-riod of two years and secondly, and more importantly, the distribution systems were already in place to distribute the funds correctly and transparently. It was short, sharp and finite. Aid to Africa is funda-mentally di!erent in that it is often given to corrupt governments and it is perpetual. This results in depend-ency, stagnation of local markets and wide-spread civil war as con-trolling the purse-strings becomes highly attractive as these cash-flows are so easy to misappropriate. It

is also suggested, rather cynically, that aid is a self-perpetuating indus-try and on the facts given this asser-tion is hard to ignore.

Throwing money at the prob-lem in Africa is not going to work because the money simply does not reach its intended target and even when it does it skews local markets to the point where tangible growth is nigh-on impossible. The unin-tended consequences of the policy have been more war, more famine and more widespread desertfica-tion. Moyo uses the micro-macro paradox as evidence of this. For example, if there is an African en-trepreneur making mosquito nets and he employs 10 others in a rural village what happens when an NGO arrives and floods the market with mosquito nets? The business fails. Sure, in the short-term the infection rate will go down but the growth that was there has now been lost. Then when new nets are needed who is there to produce them? This process is repeated time and again in this process of “developmental” aid. Aid is almost always well inten-tioned but well-intentioned and ef-fective are two very di!erent things.

Moyo belabors that the West’s at-titude to Africa are massively disen-franchising to the point where Afri-cans themselves are uneasy about the West’s involvement in their af-fairs. A recent survey showed that less than half of Africans approve of the West’s influence whereas 72% approve of China’s influence. That is because China is implementing

the same economic policies that worked for them; large-scale foreign direct investment and increased exports. “Development is no mys-tery,” Moyo argues. Let’s not forget Malawi, Burundi and Burkina Faso were economically ahead of China a mere thirty years ago. Change is possible. The Chinese have also avoided the neocolonial, paternalis-tic, patronizing attitude that those involved in developmental aid ex-hibit towards Africa. They don’t regard the Africans as children who need to be minded. They give Afri-cans the gift of self-determination which is proven to be a much bet-ter approach then fobbing them o! with money to assuage their guilt as we do. China will have invested as much in Africa by 2015 as the West has given to Africa in the past 50 years. Both sides are benefitting and with increased prosperity comes in-creased democracy.

Surely, there are alternative so-lutions that we can adopt. What are they and how do we go about im-plementing them? Moyo outlines 4 main catalysts for growth. First, African countries must access the bond markets. This has been huge-ly successful for South Africa who raised $1.5 trillion in bonds, which were 6 times oversubscribed, and in doing so became masters of their own destiny. It also created confi-dence in the market and increased investment domestically and from abroad. Thirteen of the 50 African nations now have stock exchanges which are highly competitive rela-

tive to Western markets. Liquidity is increasing year on year. Second, foreign direct investment works. It has worked in Ireland and it is working for China. Investment as opposed to aid appeasement is the way forward. Third, if the EU and US want to help Africa as much as they profess they have to allow truly free trade. This doesn’t mean the removal of quotas and duties it means the removal of indirect barriers to trade such as subsidies given to farmers. For example, over half of the EU budget is taken up by the Common Agricultural Policy. How can we say we are giving the Africans a fair deal when we refuse them access to our markets and si-multaneously dump our excess on their’s? Finally, micro-finance, a bottom to top solution, as opposed to bilateral aid agreements needs to become the norm. The Kickstarter-esque web-interface Kiva where lenders can give loans directly to those in developmental countries is a brilliant example of the innovative thinking necessary to tackle this problem and is well worth a look.

This book is a must read for any-one with an interest and the future of African development. Endorsed by Kofi Annan as “a compelling case for a new approach to Africa” it sim-ply is a must read. The reader will want a lot more Moyo, and a lot less Bono.

By Peter Martin

BOOK REVIEW:

DEAD AID: Why Aid Is Not Working and How There is Another Way for Africa

17EDITORIALTHE BULL 24.10.2012

The unequal society

EDITORIAL:

IT’S ALMOST universally regarded as a truism that the US has become the most unequal country on earth. Income levels among the top earn-ers have risen sharply over the past 30 years, leading many commenta-tors to dub this era the ‘new long gilded age’. Originating from Mark Twain’s 1873 classic The Gilded Age: A Tale of Today, a tale in which Twain decried that the epoch of technological innovation and the mass mobilization of public and private resources had engendered a new age of inequality and social un-rest, modern-day analysts belabor that the same conditions are har-nessing the same conditions that resulted in the Great Depression.

The share of the nation’s wealth

belonging to the to the often ma-ligned 1% has more than doubled during this time, increasing from 10% of the nation’s resources at the beginning of this period, to 22% in 2011, according to the Congres-sional Budget O"ce. On the flip-side, the working classes of America seem to have gained very little over the preceding decades. Though out-put growth exploded during this time, median family income fell by 3.8% from 1999 to 2004. Former Treasury Secretary Henry Paulson bemoaned this trend, noting that many Americans simply didn’t feel any of this benefits of this age of prosperity.

But is anything really wrong with this? Is inequality really such a per-

verse concept? Whether American-style in-

equality’s costs outweigh the ben-efits remains up for question. Too many accounts of inequality today assume that it must be inherently bad - that the gains made by top earners will come at the expense of the middle-classes and those at the bottom. High inequality, in com-mon language, is synonymous with diminishing relative opportunities for the mid to lower earners. It has stunted growth, led to financial col-lapse, or has turned the US system of democracy into a ‘plutocracy’. There is, however, very little evi-dence to validate these claims.

CBO data indicates that the me-dian household income - the in-come of the person in the middle of all US households - increased by 46% between 1979 and 2009 . The average income of bottom fifth rose by a similar amount during this time. Contrary to modern-day elec-toral verbiage, the middle classes and the poor have not been doing worse over time.

Granted, male earnings have not increased by very much over recent decades, but their pay rose dispro-portionately during the first three postwar decades because union-based advantages sent pay levels beyond what productivity gains would have dictated. Female earn-ings have risen considerably during this time.

As a matter of fact, the poor and the middle classes in America are doing far better than their counter-parts during the Gilded Age, and far

better than the median earners in the rest of the world.

Nor is it that inequality can be blamed on endogenous factors. A cumbersome tax code may be a driv-er behind inequality, but it is by no means the main one. Through the creation of global labour pools as a result of globalization, workers in Third-World countries are capable of fulfilling the demands of Ameri-can companies, undercut wages and tolerate more dire working condi-tions than American workers.

Cross-national comparisons are also tricky, but the evidence from a Luxembourg income study shows that if you compare the rich-est and poorest in America to their equivalent earners in Europe and other English-speaking countries, that Americans are at every point in the richest 80% of households. This pattern breaks down among the poorest fifth of households, but there is little evidence that conclu-sively illustrates that inequality is to blame for this trend.

Firstly, inequality between poor and middle to the upper classes has not seen any tangible increase since the 1980s. Secondly, changing social conditions and the rise single-par-enthoods since the early 1970s have been a major part of the story.

While there is very little to wor-ry about vis-a-vis inequality, the lack of upward social mobility in America remains a greater cause for concern. Socio-economic gaps in the college-going populace are go-ing to rise, test scores between the rich and the poor will begin to show

enormous disparities. But alleging that you can increase opportuni-ties for the poor by diminishing the earnings of the top 1% is a facetious claim to make.

Research done by Christopher Jencks shows that inequality in rich countries does not lead to lower growth. Further research pointing out that inequality leads to financial crises has also proven inconclusive.

Similarly, the empirical data cited by various scholars indicating that inequality leads to less democ-racy focuses entirely on developing rather than rich countries. There has been very little research done indicating that the United States is on its way to becoming a banana republic.

Social policy can indeed lead to increased opportunities for the poorest through various initia-tives such as improving education and through the establishment of government-sponsored intern-ship programs. However, there’s very little evidence out there which shows that that the gains made by the top 1% have reduced the oppor-tunities of the poorest in America. Between 2007 and 2009, average income-levels of the top 1% fell by 37% while the median household income fell by 2% for the median-income and the poorest families. The rich and the poor have su!ered during the crisis.

Instead of demonizing the rich, we should revert to the principles of the ‘Davos Consensus’ - we must encourage upward social mobility.

DEPUTY EDITORIAL:

Use it or lose it: private equity has a high-class problem

Mitt Romney’s candidacy for the Presidency of the United States has shone light on the

press-shy world of private equity. Mitt Romney, who was a principal and CEO of Bain Capital, a success-ful private equity firm, has precipi-tated intense analysis on the social worth of this industry. Firms, such as the Carlyle Group, KKR and Blackstone, have been variously accused of destroying viable enter-prises, o!shoring operations and needlessly culling jobs, all in the myopic pursuit of short-term re-turns. As Peter Rose of Blackstone laments,“Private equity is under unprecedented assault.”

Defenders of Mr. Romney, and proponents of private equity, have pointed to the disruptive e!ect buy-out activity can have on entrenched, cosseted managers, as well as the ef-ficiency and discipline it can impose on bloated, spendthrift companies. The Bull believes that private eq-uity firms are of societal value in-

sofar as they rationalise ine"cient businesses, provide capital for expansion and reinvigorate ailing organisations. If this results in the closure of factories, outsourcing of non-core processes, downsizing or the asset stripping of firms with broken business models, then so be it. Productivity will be increased and living standards will be raised.

Private equity not only benefits the economy, through injecting dy-namism, but also can reap impres-sive returns for investors. Although returns are very volatile and pro-cyclical, and have endured a long secular decline as competition has intensified, private equity firms have performed well for their lim-ited partners historically. However, since the late 2000’s internal rates of return have plunged from over 50% in 2004 to under 5% from 2007 onwards, as massive inflows into funds directly preceded the finan-cial collapse. This recent deteriora-tion in private equity performance is primarily due to the exorbitant asset prices prevailing at the market peak. Nevertheless, the prolifera-

tion of buyout funds, has also meant that appropriate acquisitions have become much more expensive and more sought after.

Unfortunately, even as executing high quality deals has become more challenging, so too has the pressure to become fully invested mounted. Private equity funds are awash with funds, amounting to approximately $1 trillion, mostly committed by in-vestors just before the turbulence of 2008-2009. This capital is referred to as“dry powder.” $200 billion of this money, pledged by a range of institutions (particularly pension funds), is only available for the next twelve months before it has to be released. Until now the likes of KKR have engaged in few takeovers, pre-ferring to exercise patience in the wake of the credit crunch and the ongoing economic uncertainty. But time is running out. Private equity executives are anxiously chasing transactions, and consequently overpaying. Multiples on acquisi-tions announced this year are above those of the peak of 2006 as a pleth-ora of firms bid for suitable targets.

The EBITDA multiples paid this year have been well over 10X. Prof-itable buyouts have typically been in the 6-8X range. This reflects the demand-pull inflation in the mar-ket for corporate control (although the overall M&A market is weak, companies that lend themselves to leveraged buyouts command a premium). Investors might be con-soled by the fact that financing costs are at record lows, but there is fur-ther bad news. Private equity firms are o%oading previously acquired firms to their peers instead of at-tempting to take public companies private. This is a negative develop-ment that bodes ill for value crea-tion, both from the perspective of investors and of society at large.

These hurried and forced pur-chases are likely to generate very meagre returns for investors, but protect private equity fees going forward. This suggests that the interest of investors and private equity employees are starkly mis-aligned. Whereas investors would undoubtedly rather not have their money deployed gratuitously, pri-

vate equity firms have a strong in-centive to embark on a spending spree, even in the face of a small number of potential deals. This will further place upward pressure on valuations, diminishing returns in the process. Once fees of 20% of the capital gain and 2% of assets under management are factored in then investors can expect derisory yields on their private equity investments. This is certainly a sub-optimal out-come and one that raises questions of the ethics of private equity pro-fessionals.

As undesirable as these circum-stances are, The Bull is sanguine that they will be ephemeral, and hence not worth fretting about. Hopefully, once these artificial pressures on private equity firms dissipate, they will once again be free to bring their expertise to fail-ing firms and stagnant industries in a more measured fashion in the near future. With activist govern-ments stifling business across the globe, the last thing we need is mal-functioning private equity firms..

STUDENT MANAGED FUNDTHE BULL 24.10.201218

Sector Summaries

SINCE OUR last update the fund has performed solidly, gaining ap-proximately 1.5% in the face of an earnings season that was fraught with uncertainty and concerns about a global slowdown. Markets rose strongly in the third quarter on the back of what appears to be a co-ordinated e!ort by central banks to support flagging global growth rates. Likewise OPEC, and more specifically Saudi Arabia, have es-sentially placed downward pressure on oil prices to o!set the impact of QE, announcing its intention to em-ploy more of its spare capacity to aid growth in the world economy. Risk appetite returned as the US Federal Reserve, the Bank of Japan and the European Central bank announced monetary policy measures in Sep-

tember as expected. Also contrib-uting to this is what appears to be a greater appreciation on the part of investors of the hurdles facing growth in a global economy that is still struggling to de-leverage after a financial crisis that happened fours ago. The fact that the latest slow-down in global activity indicators have not led to a stream of signifi-cant downgrades to GDP growth, supports the view that investors are looking at the bigger picture. How-ever, in the last week, mixed com-pany results have not boded well for equity markets, especially consid-ering the majority of profit expecta-tions had been lowered. Q4 results may be telling. Are monetary policy actions actually aiding the underly-ing global economy or simply inflat-

ing asset prices?With equity markets performing

well, it was a pity we were unable to better capture this ascent, further highlighting the need to be fully in-vested and to increase the pace at which this is currently conducted. As alluded to in the last report, a new streamlined investment pro-cess should allow us to reach our current capital investment goals of 50% invested by Q1 2013 and 60% by Q2. All ten sectors are set to complete their first investment proposals under the guidelines of our investment process by early De-cember. This should leave us well placed to enter positions in the run up to the US fiscal cli! deadline of January 1st 2013. If one looks back to the August debt ceiling dispute

of last year, decisive Congressional action was only taken in the final days leading up to the deadline, with considerable consolidation and volatility characterising mar-ket performance during this time of political uncertainty. With no pre-election (November 6) discussions taking place and congress set to re-turn on the 13th, the ideologically divided parties have left themselves with just six weeks to avert a fiscal cli! that would undoubtedly lead to 3-4% fall in GDP and throw the US back into a recession. Bipartisan-ship and compromise haven’t come naturally to the current congress, being one the most unproductive in recent decades. Constructive ac-tion from both sides only appears to have been adopted when prompted

by severe market consolidation and a looming deadline. We are of the belief that a compromise will be reached but in much the same fash-ion as the events of August 2011. It is therefore our intention to utilize this political impasse and expected equity consolidation to our advan-tage, acquiring stocks that trade at a discount to their intrinsic value. With each sector now operational we look forward to what looks set to be one of our most productive years to date within the investment divi-sion.

WILLIAM GRASSICKCHIEF INVESTMENT OFFICER, TRINITY SMF

Performance report

INVESTMENT PROCESSSCREENING

During the initial stages of our stock selection process we employ numerous screeners to identi-

fy stocks that trade at low multiples relative to their respective fundamentals

FUNDAMENTAL RESEARCH Covering a range of criteria that require both

qualitative and quantitative analysis

VALUE DETERMINATION To determine a company’s intrinsic value, each

sector team is expected to employ discounted cash flow models during the course of their stock pitch

TRADE EXECUTION Finally we employ technical analysis to maximise

our potential returns in the short term where applicable

19INDUSTRY INSIGHTTHE BULL 24.10.2012

Sector Summaries

Asset management in reviewThe tempestuous global eco-

nomic and regulatory environment since the financial downturn has asset managers reconsidering their growth strategies. Uncertainty sur-rounding monetary returns and overall growth are being mirrored by the reality of a slow economic recovery and an indeterminate financial and regulatory environ-ment following the 2008 market correction. Notwithstanding the turbulent times, the forecasts for the asset management industry are positive largely due to the perfor-mance and operational e"ciencies achieved during 2011.

While intensified regulatory inspection generally has negative connotations, the increased trans-parency and sturdier risk manage-ment practices resulting from this scrutiny are helping the industry restore investor confidence and spur innovation in the new econ-omy. However, given the fact that 2012 is an election year, cautious optimism is well advised.

The Dodd-Frank regulations, an act that made changes in the Ameri-

can financial regulatory environ-ment that a!ect all federal finan-cial regulatory agencies and almost every part of the nation’s financial services industry, has polarized the asset management industry. For the first time, private investment advis-ers and funds lie within the jurisdic-tion of the SEC. Asset management groups are moving to anticipate, gauge and administer these altera-tions as they occur. The act conflicts directly with progressing investor expectations leading to a divide be-tween large institutions and small and mid sized asset managers.

The implementation of a num-ber of reform measures has been delayed due to Congressional budg-et cuts, adding to the insecurity among fund advisers. Forecasted compliance costs are compelling fund advisers to reconsider their growth strategies, particularly ad-visers of smaller funds that may be unable to survive costs of conform-ing to the new regulations. Fund amalgamations may accelerate in years to come as small firms merge to achieve better economies of

scale.Despite the impending extra

costs from a heavier regulatory burden, the smaller asset managers have ingen-iously carved out a strategic function that is even attracting the large insti-tutional inves-tors. They can o!er more attractive risk-reward balances for investors’ require-ments only attain-able as a small flexible asset man- ager. In

a d -d i -

tion, they still em-brace a philosophy o f compliance and have checks that are applicable to their size.

On the other end of the spec-trum, large institutions with vast resources, technology and assets under management can e!ortlessly comply with expensive guidelines

and accommodate more vigorous i n - vestor requests to

execute due dili-gence on

their op-e r a t i o n s

and ser-vice provid-

ers.I n v e s t o r s

are redefining and expanding

their defini-tion of

risk in re-

sponse to the f i -

nancial turmoil. Subsequently, in-vestors have realized a new level of sophistication in their demands that mostly the larger

asset managers have been able to respond to. With the general slump in returns, experienced in-vestors have become savvier about

management and incentive fees and are more apt to negotiate for tiered fee structures or other provisions that lower management and incen-tive fees. The larger asset managers have more wiggle room to accom-modate lower incentive and man-agement fees.

Stakeholder demands for greater fund transparency are also putting pressure on asset managers to im-prove the reporting accuracy of and governance controls over the funds they manage. Larger fund managers are increasingly relying on technol-ogy and outsourcing to support the institutional-level reporting and compliance processes that are man-dated by today’s stricter regulations and demanded by investors. These technologies and outsourced con-sultants represent additional costs that the smaller and mid-size man-agers cannot a!ord.

Pre-Dodd-Frank, many of these behemoth organizations already had fairly sturdy governance as well as operational and risk manage-ment infrastructure. So far, these well-equipped organizations have been reaping the greatest benefit of investor uncertainty – when in doubt go for the large, sophisticat-ed, well-managed manager.

Sector Summaries

When the Maritime Labour Convention 2006 comes into force it will replace 40 existing conven-tions and 29 regulations. It will provide seafarers with fair terms of employment and guarantee them safe, secure and decent living stand-ards and working conditions on board. Shipowners are set to benefit from having a clear, consistent set of standards with which all must comply. Once the Convention is in force all ships which trade inter-nationally must meet its require-ments, whether their flag States have ratified it or not, ships will be subject to inspection and if neces-sary, detainment, if there is a failure to comply with the points outlined in the convention. The convention has come about due to the work of shipowners, representative bodies, governments and seafarer’s unions over the past number of years. The convention was initially adopted in 2006 at an International Labour Conference involving about 1,000 delegates from the relevant sec-tions of the industry.

The necessity of bringing the Maritime Labour Convention into e!ect was the widely recognised disparity between seafarers operat-ing under a wealthy ‘flag’, and those working under a comparatively less

wealthy ‘flag.’ The flagging of a ship denotes which country the vessel is registered in, and hence which country’s employment regulations are most likely to be adhered to. Of course there are many cases of vessels from all around the world being registered in places such as the Bahamas and the British Virgin Islands so as to exploit the favour-able business conditions present in these states. The obvious compari-son to cite when discussing living and working conditions on board is that between seafarers from the East, and those from the West. It is no secret that some countries are more inclined to be safety conscious than others, particularly in the western world. Where the Maritime Labour Convention will impact in this instance is that inspectors will have the power to board vessels they suspect of non-compliance and to impose fines and/or detain the ship if it is found to be in seri-ous breach of the convention. These powers are almost identical to those already used by the International Safety Code and the MARPOL ma-rine pollution protocol.

From the shipowner’s perspec-tive, the convention can be seen as both positive and negative. On the positive side it will provide ship-

owners with a clear set of require-ments to fulfil and will collate all of the existing documentation so as to make it easier for guidelines to be followed, rather than the previ-ous system of having to continually refer back to the 69 existing docu-ments. This increase in the conduct and understanding of safety codes at sea by the shore sta! will also benefit seafarers in that a clearly defined procedure for grievance as regards conditions will be laid out. On the negative side of things the implementation of the MLC 2006 will be a costly one for employers. Members of sta! are required to participate in a twelve week MLC training course, costing both time and resources, and sta! will have to be convinced of the merits of the change. There is also the question of wages to be considered; many crewmen are provided by various crewing agencies and as such would not be paid a uniform wage as they, or their vessel, may hail from a dif-ferent country to that of their col-leagues or sister ships. The MLC 2006 will ensure that all of the crewmen sailing for a specific ship-owner would be guaranteed equal wages, and if one considers the high minimum wage in Ireland, Irish shipowners could soon face a hefty wage claim.

To come into e!ect the conven-tion must be ratified by at least 30 member states with a total of the

world gross tonnage of ships of 33 per cent by August 20th 2013. As of today 30 member states have signed up, with these controlling 59.85 per cent of the gross tonnage, so as it stands the MLC will be implement-ed. It should, however, be noted that close to home neither Ireland nor the United Kingdom have rati-fied the convention; in fact the only major world player in terms of gross

tonnage to ratify the convention is Panama. Though it is more than likely that MLC 2006 will pass, its terms have not been agreed upon by many of the world’s seafaring na-tions, and such apathy towards the MLC could lead to issues with im-plementation, particularly among the richer and more powerful ship-owning countries.

New burdens for ship operators

Ian O’Connell is bullish on asset managers despite new regulations

Edward Teggin explores the recent developments in the Shipping Industry.

› Shipping companies face increase costs

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