General Body Meeting 09.15.11

1. General Body Meeting 09.15.11

2. Agenda • Announcements • Opportunities • Cornell Undergraduate Stock Competition • News Updates • American Jobs Act + Eurozone Update • Yahoo Implosion • Financials Pitch: Goldman Sachs Group

3. Opportunities • Newsletter (David Kim: sk852) • 250 word sample by Saturday, 9/17! • Research Reports • Groups of 3 – 4 • Closely tied to Education Series

4. Cornell Undergraduate Stock Competition • Intercollegiate Stock Competition • Reception: 5:30pm on Tuesday, 9/20 • Email njy3@cornell.edu with resume by Sunday, 9/18 • Presentations: Wednesday @ StatlerHotel Amphitheater • Open to public • First round: 9:00am – 11:00am • Final round: 12:30pm – 1:30pm http://www2.johnson.cornell.edu/parkercenter/undergradstockpitch/

5. News Updates

6. American Jobs Act • White House Talking Points: • Cut the payroll tax in half • “Rebuilding and Modernizing America” • Extend unemployment insurance • Deficit Neutral • Will it work? • Some bipartisan support • A decent alternative to limited monetary policy options • Some kick in the short-run, but questionable long-run impact

7. European Central Bank • Dr. Jürgen Stark, member of the executive board (unofficially: chief economist) resigned. • Considered a major advocate of European economic stability • Result=>Investors highly insecure, volatile markets. Dax 52 Week Low (4,965 -12th) • Euro at 6 month low.

8. Endangered Countries • Greece: Troika to return next Monday (19) • Portugal: 4 billion euro from IWF. Positive outlook towards meeting goals. • Spain: CDS insurance premium for treasury bonds at record value • Italy: placement of 5 year government bonds reached new record high (5.6%). • Ratings of European banks at as low as 2009 after the collapse of Lehman Brothers • China recently tripled its investment in the Eurozone.

9. Germany • Following the Verdict of Germany’s Constitutional Court, the German Parliament needs to approve measures to establish the ESM. • ESM: Successor to the ESFS, with a greater capacity and efficiency. • The German Minister for Economics, Philip Rösler stated that letting Greece default on its debt can be considered. • This gave rise to the idea that Germany would be willing to let this happen, but Rösler is the head of a small, failing party. • German Chancellor Angela Merkel distanced herself and German policy from the idea of Greece defaulting. • Ongoing debate. Ruling coalition divided.

10. Exchange Rates • 6 month low compared to USD. • DAX is also at a low. Considering German financial potential, it is undervalued. • Would be a possible investment option, if one had credible evidence the current value was a floor and would increase. • Recommend following and tracking closely.

11. Yahoo! AleksandarZvorinji

12. Yahoo News Update • CEO Carol Bartz fired over the phone – Sept 7 • lack of turnaround of the company • Tim Morse (CFO) named interim CEO • Bartz joins board to later be fired after Forbes interviewing saying she got fucked by the board • Investors seem happy Bartz is out of the picture • Angst shifted toward the board chairman Roy Bostock • Daniel Loeb at Third Point (5.2% ownership): board and management needs sweeping changes, fresh eyes and a big turnaround • 5 CEO’s over last 10 years

13. Yahoo News Update • Yahoo over the last few years… • Been losing to Google for quite some time • Missed social media and mobile apps • Yearlong discussion to get back on track • Independent directors: not doing as well as it could • 10 year search engine deal with Microsoft, Bing powered search but 50-50 split of ad revenue • Ad revenue down from $1.8B to $1.5B y-o-y • Communication: losing to Gmail and Facebook

14. Yahoo News Update • Bartz’s time at Yahoo • Goal to increase time spent on Yahoo, but decreased by 33% since she was appointed CEO • Failed reaching a series of performance targets • Focused on cost cutting and incremental improvements • Lack of focus on products and innovation • Made the company run better, focusing on deals

15. Yahoo News Update • Looking ahead • Acquisition as a whole or sold off in parts • $16B market value: private equity firms sniffing around as well as AT&T • Product driven CEO, focusing on innovation, social media, video and mobile. • Strategy: CEO product focused and COO operations

16. Stock • Stock rose 7% during September 7th • Option prices of Yahoo rose by 14%, signaling expected stock volatility • Valuation: Third Point ($20), Barclays ($18) • Lower P/E at 17 compared to AOL at 23

17. Financials Sector Pitch: Goldman Sachs John Troncoso Matt Burns Billy Maselli Bobby Wong Alex Lucken

18. Goldman at a Glance

19. Thesis • We rated Goldman Sachs a buy despite negative market sentiment and poor price performance over the past year. • Goldman is a best-in-class brokerage franchise with a solid market position over many businesses. • Goldman has one of the strongest balance sheets in the financial sector. • Goldman has a long track record and has repeatedly proven to be a high caliber company that will outperform over the long-term. • Short-term speculation and investor fear have driven Goldman’s price down creating value for rational investors with longer time horizons.

20. Industry Overview

21. Investment Banking Services • Investment banks engage in: • Equity and debt underwriting • Mergers and acquisitions advising • Corporate finance services • Fixed income, currency, and commodity trading

22. Industry Snapshot • Goldman Sachs holds the largest percentage of market share within the Investment Banking Industry. • Annual growth has contracted sharply over the past 5 years, but this trend seems to be at an end. Market Share Goldman Sachs: 18.3% J.P. Morgan Chase & Co: 15.9% Bank of America Corporation: 14.6% Morgan Stanley: 14.6% Citigroup Inc.: 7.7%

23. Investment Banking and the Economy • Stock market performance affects: • IPO offerings • Also affected by consumer sentiment • During strong markets, IPO’s become more likely • Values of AUM and associated fees • M&A Activity – related to corporate performance. • Dependent on company earnings, business confidence, and economic outlook

24. Bernanke and the Banking Sector • Bernanke vowed to keep the Federal Funds rate near 0 through 2013. • Potential of a QE3 or similar program has increased in recent weeks. • Bernanke’s willingness to intervene monetarily is good news for banks.

25. European Crisis • Greece is at the center of a European Union crisis. • “PIGs” • Continued volatility from the summer. • ‘Orderly default’ is more becoming more likely. • Shock resignation of top German ECB official Juergen Stark.

26. Possible Contagion to Banks • According to the Bank for International Settlements, US banks have approximately $32.7 billion of credit guarantees linked to Europe. • This number does not include any hedges employed by US banks, so the actual exposure is far less.

27. Investor Fear and Recent Volatility • The volatility index was up nearly 100% over the summer. • Recent market volatility has lead to sharp declines in global markets. • Investors are currently extremely cautious. • Pessimism and fear have created value in the markets, especially within the financial sector.

28. Regulations: Basel III • In 2009, the Basel Committee developed new global standards to address systemic risks among banks. • Improve the ability of banks to absorb economic shocks • Improve risk management and governance • Strengthen bank’s disclosures • Standards: • Greater focus on common equity; 4.5% of risk-weighted assets. • Capital conservation buffer of 2.5% of risk-weighted assets • Total of 7%, plus 2.5% for ‘systemically important firms’ (9.5%).

29. Dodd-Frank: Highlights of Legislation • Consumer Protection agency with authority and independence • Ends Too Big to Fail Bailouts • Imposing tough new capital and leverage requirements • No longer will the government prop up individual firms • Transparency and accountability for ‘exotic instruments’ • End Goal: Protects Investors

30. Fannie Mae and Freddie Mac Lawsuits • Last week, the overseeing body of Fannie Mae/ Freddie Mac sued 17 large financial firms. • Blame the firms for luring the government-run mortgage giants into troubled loans. • The lawsuits are filed against (among others): • Goldman Sachs • Bank of America • Citigroup • JP Morgan • Credit Suisse

31. Competitive Landscape • The financial crisis has caused an overall consolidation of the market for financial services. • Bank of America acquired Merrill Lynch; Morgan Stanley acquired Washington Mutual and Bear Sterns. • Lehman Brothers and Bear Sterns no longer exist. • Goldman Sachs is at the top in terms of revenue generated in the US and globally.

32. Competitor Comparison

33. Competitor Comparison

34. Investment Banking: Critical Analysis • Investment Banks have been hit hard over the past few years but there is light at the end of the tunnel. • Despite the perception that Goldman’s strongest years are behind it, Goldman has maintained market share. • S & P 500 companies now have more than $1.2 Trillion in cash. As uncertainty fades, expect a lot of M & A.

35. Investment Banking: Critical Analysis (2) • Goldman employs some of the smartest and savviest people on Wall Street. They will adapt quickly to the new landscape • Remember what Warren say about wary markets • Regulation is never as tough and stringent as originally proposed

36. Company Overview

37. Company Background • A premier global investment banking, trading, and asset management company with leading market shares across its businesses • Goldman weathered the financial crisis better than most and is in a fairly secure financial footing • Strong management team that kept Goldman strong under financial crisis remains • Lloyd Blankfein – Chairman and CEO • Gary Cohn – President and COO

38. Company Background (2) • Four separate segments of operations • Investment Banking • Investment Management • Investing and Lending • Institutional Client Services (majority of revenue) • Leading bank in Mergers and Acquisitions and Investment Banking (20.2% global)

39. Sales Breakdown • Goldman’s revenue structure is diverse enough to help reduce exposure if one field declines.

40. Balance Sheet • Coming out of financial crisis, management has increased liquidity • Actively de-leveraged firm since 2007 • Significantly reduced high risk assets • This is largely responsible for the decreased margins that we have been seeing at Goldman.

41. Revenue • Goldman has seen revenue declines over the past few years but it has faired better than many of its competitors • Goldman’s large international exposure may reduce exposure to domestic uncertainty

42. Income • Analysts are predicting that net income will recover in 2012. • As cost cutting measures take hold, profit margins will expand.

43. Ethics Concerns • Has been involved in a number of high profile scandals over the past few years • European Sovereign Debt Crisis • Insider Trading • Fraud • Business Principles and Standards Committee Report • Formed on May 7, 2010 to review business standards and practices • Eight Month Review with 39 recommendations for change • Overseen by Board of Directors with advice from private consulting firms for more reliability

44. 14 Business Principles • Created 30 years ago to define the fundamental way Goldman should run business • Put clients first • Make an unusual effort to recruit the best • Stress teamwork • Etc... • Business Principles and Standards Committee Report affirmed the 14 principles and showed the need to strengthen certain principles

45. Company Overview: Critical Analysis • Goldman not only maintains the highest market share in investment banking but also dominates the global banking scene.

46. Company Overview: Critical Analysis • Goldman does not have as significant exposure to many of the mortgage related lawsuits as competitors. • In the event of industry settlements, Goldman’s EPS at risk is only $.63 or 6% of total EPS.

47. Company Overview: Critical Analysis • The importance of Goldman’s strong balance sheet cannot be stressed enough • Goldman is still the best in the business and recruits the best talent in the industry • Goldman’s partner system is unique within the investment banking realm and is a great competitive advantage • Goldman’s high risk, high reward days are a thing of the past

48. SWOT

49. Strengths • Global Market Leader- Very strong brand name within the financial sector • International Focus- Office branches located around the world • Employees- Extensive recruiting at elite universities around the globe ensures that they have the top talent in the financial sector

50. Weaknesses • Percentage of Trading Revenue within Total Revenue- recent laws have limited how much risk firms can assume which has reduced the amount of pre-tax revenue made • Public Perception- Overwhelmingly negative public perception of Goldman Sachs and how they have run their business • Litigation Issues- Goldman Sachs has been involved in a few very costly lawsuits that have negatively affected both profitability and public perception