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A Presentation by David Tepper to Undergraduate Business Students at Carnegie Mellon University

November 12, 2007
This transcript has been condensed and edited for clarity.

INTROdUCTiON: I think you all know who David is. Hes of course the benefactor of our school and what you probably dont know and may not know, is that he grew up in Pittsburgh and went to Peabody High School. He then went to the University of Pittsburgh for his undergraduate degree, worked for a year or so and then came back here and got his MBA and graduated with his MBA in 1982. He was one of my students back then. You know, everybody always claims and attaches themselves to anybody thats successful, so Im claiming that a lot of his success must have been due to those courses he took from me, because he took a number of them (laughter). So anyway, its great to have David here. Very much appreciate you coming in especially to do this today and I know the students will appreciate it as well.

Now, this is just kind of an open, free forum, an opportunity for you to ask questions and hear answers from David. He does not have an hours worth of material that hed prefer to talk about, because he wanted to give you lots of time to ask questions. So do make sure that you ask questions. Welcome, David. DAVid TEPPER: Thank you. I had a great time when I was a grad student here at Carnegie Mellon. And one of the reasons was Ken and one of the reasons was this place, being as small as it is, as intimate as it is, as friendly as it is. For me, this place was, in a way, almost life changing. I had a great time here and it really gave me the education I needed. It kind of filled a gap for me, moved me to the next level. My grad school class was 120, I think. Your classes are still

very small in the undergraduate school. I guess the biggest class is like 150, is that right? You know, one thing I want to mention to you guys was that your program is always on our minds here. We constantly talk about it, we constantly talk about recruiting. You guys are just as important. I know theres some feeling here about second class citizens. Theres some BS like that, and that is BS. We think you guys are really important. In fact, I told Ken that theres a really high regard at least in my world on Wall Street for people out of this undergraduate program and undergraduates have a little bit of an edge on Wall Street, but this year it may be tough all around.

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DAVid TEPPER: I want to talk a little bit about what I do and when I started [my career] so you guys have some feel for that. I came out of school in 1982 and I went to work for Republic Steel. I didnt go right into Wall Street. Then I went to a mutual fund and then to Goldman Sachs. I was the head trader at the junk bond desk for Goldman Sachs and I did that for eight years. If any of you guys know anything about economic history or Wall Street History, I was on the other side of Drexel Burnham [which was] run by a guy by the name of Mike Milken. So I was there early in the junk bond era at Goldman Sachs. When I left I started a hedge fund called Appaloosa Management. Appaloosa was a fairly early hedge fund and weve been doing it for 15 years. Weve invested in distressed debt and we invest around the world. We were one of the first investors in Russia and I was in Russia in 1996 when Yeltsin was on the tank. We can talk about that, if you guys would like to. Weve had Donald Trump in my office and we could talk about Donald Trump if youd like to. [Laughter] Appaloosa was the first non-Korean to buy Korean treasuries. We were there in the Asian meltdown in 1998, so we can talk about that if youd like. We were big in 2002 scandals Adelphia and WorldCom and different business scandals. We were big in some of those companies, investing in them on the way up and we can talk about that if youd like. If you like we can talk about the job market on Wall Street this year, which is going to be a little bit tougher for you guys coming out, you seniors. Its unfortunate, but hey, its just the way it is and you know, hopefully itll all work out and you have a long life, and it will [work out], because youve got a great education here. I really, really believe that.

I think theyre always going to hire a certain amount of people from here, but it is a tough year and there are a lot of firms losing money and top guys losing money, and losing their jobs. We can talk about the current market right now, if you want. I think its a very tough market right now. Were probably in the biggest percentage cash weve ever been in my fund. The other thing you should ask is about life and family and whats important. You know, one weekend that I was going to come up here, I was stuck on the runway. We actually had my reunion it was my 25th reunion and I was going to go home the next morning and come back the next night because my daughter had a - I think it was a county match for volleyball, which is the stuff thats really important in life and will always be important and you guys should know that. Anyways, Ive given you a bunch of different things that Im going to try to open up for questions. STUdENT: Ill start off with an easy one: you seem like youve realized all your ambitions; youre very successful, but what were your ambitions when you were an undergrad? DAVid TEPPER: When I was an undergrad, I was trying to figure out what I wanted to do, whether I wanted to go to law school, or go into business, so I took the LSATs and I took the GMATs. I decided on business school. And I thought about acting. Like a lot of people, I was the best actor in my high school. When youre the best actor in your high school, you think youre going to be a famous actor until you meet the other 100 people that are best actors at their high schools when you go to college.

I decided on business at some point when I went to work for a bank in Pittsburgh in the credit department. Then I went to work in their trust department as a stock analyst. I really wanted to be an investor. Thats what I really wanted to do. Actually when I was an undergrad, I was trading stocks for myself with whatever money Id made on the side. And coming from Peabody High School, I didnt have a lot of money on the side. I knew I wanted to be in investing somehow. Although, even working at Equibank -- that was the name of the bank -- I dont know what its called now; probably three take-overs ago. I was a security analyst over there, but I really didnt know how it all tied together and when I came here [Carnegie Mellon], I had some ideas, but this place really gave me everything I needed. I guess this doesnt totally answer your question, but Im going to sell the school a little bit even though I went to work at Republic Steel afterwards, when I went to Wall Street, I was just so far in front of other people, like with options theory. STUdENT: As an undergrad when you were investing on your own, what kind of strategies did you have and, as a follow-up, what strategies would you advise undergrads to have right now about investing, now that youre more knowledgeable? DAVid TEPPER: There was this strange thing at the time. I was playing options, actually. It was really, really early in the options market, I mean, it was just really beginning and I didnt know what the heck I was doing, to tell you the truth. Options used to trade at 1/16 increments so I figured that I just put


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in orders to buy the 1/16. Buy at 1/16 and sell at 1/8, buy at 16th and sell at 1/8. And you could just do that. I had it automatically happening; I didnt have to do anything. 1/16 and 1/8, 1/16 and 1/8. It worked really great, until the market started taking off and then I went bankrupt basically. So you know, you have to be careful about that sort of stuff. I first invested, actually, when I was in high school. I invested in this company called Career Academies because I looked at the stock chart and it was way down from where it was before. I cant remember what year it was in high school, but I think the stock was trading at two dollars a share. Somehow, I had money saved and I had my dad invest $200 with me. The company went bankrupt absolutely wiped out, but maybe thats why I liked bankruptcies after that (laughter). But if I had a strategy, that was it and that worked really well, because there was nobody else kind of doing it. It just wasnt a continuous function, it was an anomaly in the marketplace and I actually made more money than I eventually lost. STUdENT: You started out working at Republic Steel and you went through their whole distress, their kind of downfall, which is where Im guessing you got very familiar with distressed debt. Do you think that helps you more, or do you think you would have been just as well off to start with a hedge fund? DAVid TEPPER: You know, its an interesting question. I was investing when I was at Equibank. When I was at Republic Steel, it helped me as an analyst, because I was talking to banks and the company was in trouble at the time. I was at Republic Steel only two years and they did more financings [when] I was there than the

previous 100 years of the history of the company. It was a really great time. Ill tell you a funny story, actually. I was at Republic Steel and I was there probably seven weeks and they did an across the board pay cut of 7 percent. Everybody got out of grad school and talked about what they made. So then, seven weeks after I got out, 7 percent pay cut. I think I got calls from one third of my class. Good choice Tepper, But things kind of work out after a time. STUdENT: Do you think that, to become a great hedge fund manager 15, 20 years down the road, that that was better than going to Wall Street to start out as an analyst right out of undergrad? DAVid TEPPER: Yeah, I think so. You know what, when youre starting out, there are no bad choices. There are no bad choices right now for you guys. There really arent; I really do believe that. You just keep driving at what you want and even if you dont go to Wall Street right away, and you still want to, then you still can go there. Republic Steel to a mutual fund, to Goldman Sachs, I mean this stuff is true. You know whats funny about you guys now versus me then, or people my age then? You guys are so much more uptight about this stuff. I mean, really, everybodys uptight. I look at my neighborhood; theyre uptight in high school. SATs and that stuff; much more uptight than we were when we were young. Maybe its that much more competitive, but you know what, its okay if you dont know what you want to do exactly right now. Its not as good if you dont know what you want to do when youre 30, but right now, you can be a little confused and try to figure it out and you can have a lot of different paths.

I kind of knew I wanted to do investing. I wasnt sure, I was leaning that way so I kind of knew where I wanted to try to get to. So if you do, just dont stop driving there. You dont have to settle. Just keep driving at it and it will come. STUdENT: Youre very successful, but you must have made some mistakes along the way. Could you share with us one of your biggest mistakes, how you overcame it? DAVid TEPPER: Oh, I made a lot of mistakes. Ive got to pick which one. Ill give you one career one from Goldman Sachs. I was at Goldman Sachs, I mentioned, for eight years. When I started there, I started there as an analyst out of Keystone Custodian Funds mutual funds. I was the first outside hire for the junk bond department and I was hired to help start the department. I was there for six months as an analyst and the trading effort was real screwed up, so they moved me into trading and at six months I became the head trader. Its one of those great stories, I mean, Horatio Alger lives sort of stories, right? So you have Republic Steel, mutual fund, head trader Goldman Sachs its a really nice little story. I was there and I had a pretty good career and I was up for partner pretty fast. I was up for partner, but I was kind of young and they skipped over me. Then the junk bond market crashed the second time I was up for partner and that didnt work. But the third time I was up for partner, I had a lot of relationships throughout the firm and I was making a lot of money. But a funny thing happened on the way to the partnership at Goldman Sachs. This guy by the name of Bob Rubin who later was the Secretary of the Treasury he was the head of fixed income when I was there. I liked Bob Rubin because he came

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from risk arbitrage, and junk bonds are kind of like equities. So I would go into Bob Rubins office and talk about the markets. And if I wanted to take a big position, Id go into Bob Rubins office and say, hey, I want to take a big position and wed talk about it. Well, Bob Rubin became Vice Chairman of Goldman Sachs and he was still on my floor and the new head of fixed income was a guy by the name of Jon Corzine, whos now governor of New Jersey. Jon Corzine was a treasury trader and knew nothing about corporates, so I would never talk to Jon Corzine I was still a young guy. I wanted to get the answers fast because I just wanted to get my job done and I went to the guy that had the information. For a year, I continued to go to Bob Rubin. Bob Rubin should have said, Hey, idiot, go and talk to Jon Corzine, hes the new head of fixed income. But I think Bob Rubin liked to have the conversation. So when Jon Corzine was the head of fixed income and then it came to the next partnership, Jon Corzine said, Okay, Teppers not one of my boys. Hes one of Rubins boys. So he never let me become a partner. Even though Im not a real political person, youve got to be aware. You know, Jon Corzine was the head of fixed income, he was up the ladder. When I was taking positions, I should have gone to see Jon Corzine. That was probably a mistake. That was a mistake, but heres how life goes. I could have gone there and gone to see Jon Corzine, right, and maybe I would have been a partner at Goldman Sachs. I would have had worked long hours, I would have had more wrinkles, been miserable. Or I could have started a hedge fund and made seven times, or a hundred times more money than I would have made at Goldman Sachs, so whats bad is good and whats good is bad, right?

Life takes funny turns. Thats really important for you guys. Youve got a long life. Dont get upset by setbacks. Setbacks are another way to say opportunity. That was a mistake [at Goldman Sachs] though; in your career, dont do that. Thats stupid, okay. And I wasnt trying to skip over [ Jon Corzine], I was just nave. DAVid TEPPER: The biggest mistake I made when I had the hedge fund was [when] we were really caught in Russia in the meltdown in 98 when Long-Term Capital [Management] went down. We lost 20 percent or something that year, which was a really bad year for us. We were very involved in emerging markets; Russia, Brazil, the whole thing. When Russia hit and when 98 hit, not only did the liquidity disappear, the spreads widened out. Youre seeing some of that right now again in the marketplace. So that was a mistake, a false liquidity. We thought the liquidity was there. I thought the liquidity would be there, would always be there and I was not careful about my position size at the time. STUdENT: What do you think of the housing market? DAVid TEPPER: What do I think about it? It sucks. You know, Ill tell you the truth we call it the slowest moving train wreck ever. It just has so many implications and its moving so slow and its still not done. Youre right now in the period where you have these option arms resetting. Youre going to see many more defaults, or many more people not paying their mortgages, because theyre done with their teaser rates.

It has broad implications for the economy. You see even a company like Cisco, thats just reported that theyre seeing weakness in financials and weakness in autos, because of order rates. I think youre going to have a US economy thats going to be slower than it otherwise would be for the next two, three years. Not just sub-prime, its just all mortgage lending. If you look at the charts if anybody goes and looks at how many houses were bought year by year and look at the years 2005/2006, its off the charts. Youre coming back down off of that. And thats going to have some effects on the economy, not just in the mortgage market. Were spending a lot of time in the sub-prime market now, trying to figure out if we should buy anything. Another mistake I made was, we should have been shorting that market. We didnt short that market and it was like a free option to short some parts of that market. It was so ridiculous in retrospect. I knew about it, because I had some people telling me about it and I was too busy, or too unfocused to look at it, but I dont know if that answers your question or not? STUdENT: What are advantages or disadvantages of managing so much money? DAVid TEPPER: I guess the advantage is you get your calls returned. The disadvantages are The money could be too big for the investment opportunities at different times. Were a fund that will give back money, which is kind of unusual in this world. A lot of funds will just be asset gatherers. Were more pure investors. It swings both ways though. Getting to be in the main calls really helps you and were big enough that anybody will come into our office if we ask them to come in. If youre small, that wont happen, so you have incredible access at this size.


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But you know, you can be too big and miss certain opportunities, because you have so many things youre looking at. STUdENT: You mentioned that you have to sell yourself all the time, what do you think are the best ways to do that and be true to yourself ? DAVid TEPPER: Well, you already answered it. Just be yourself. I think the best way to do it is to just go in there, know what you want, okay, and be true to yourself. If you know what you want, then people will come through. I generally think that. If you dont know what you want and youre faking what you want that will also come through, I think. I think youve got to be true to yourself. Know what you want and [do] not be afraid to go after it, full stop. STUdENT: [Did you know you wanted to be an investor when you were in college?] DAVid TEPPER: I probably just liked investing, so this was the purest form. Its funny, I got into junk bonds by accident when I was at Republic Steel. It was having financial trouble and we were junk bond issuers. Then I got hired at Keystone because I had that experience. When I was at Keystone, I was pretty good at it and then Goldman Sachs hired me when they started the department. So it was kind of lucky. It is not bad to be lucky, by the way. Better to be lucky than smart, if you ever heard that, or lucky than good, or whatever they say. When I was at Goldman, I knew I wanted to invest. I liked investing and you know, junk bonds. I just fell into it and it was kind of hot. But it was what I liked. I wanted to invest and Im still doing it and I like doing it, so youve got to do what you like.

STUdENT: You talked about being one of the first investors in Russia and Korea. How do you gauge political risk and instability? DAVid TEPPER: For us it was just doing credit analysis of the different countries. In Russias case, it was cheap when we went in. You know, we lost a lot of money in 98. But then we went further into Russia because everybody was selling out of Russia. It got so cheap on the fundamentals because banks wanted it off their balance sheets by the end of the year. So we bought a lot. You do the analysis of the country just like you do a corporate analysis to see what the ability to pay the debt back is. We were debt investors so you want to see the basic ability of the country to pay its debts at that time. It was just fundamental analysis, deciding if the stuff was cheap enough or not. In Russias case, [it had] incredible natural resources. In Koreas case, [it had] incredibly industrious people and an incredible export machine potential. With the falling won at the time, that just created what we thought would be the ability to get reserves real fast. Ill tell you a funny story of Russia, this is a true story. We were in Russia in 1996. That was a crazy time. I dont know if anybody is a history person at all in here, but 1996 was crazy. And when its a little bit dangerous, its a lot exciting. Ive got a couple of great Russia stories Ill tell you a story. We were supposed to have a meeting with this guy, Boris [unintelligible] who was a big deal investor in Russia at the time. And Boris [unintelligible] was trying to take over some companies in Russia which was kind of dangerous in 1996. He had a brokerage firm and we were going to go up to his office. We go to this office and at the bottom of his office theres all these guys with

machine guns. Were like, what the hecks going on? I happened to have taken two years of Russian when I was in high school, so I can speak basic Russian. I try to see whats going on, tell them who I am and who were going to see. They let us go up to the office and when we got up to the office, theres [almost] nobody there. One guy. He says Boris [unintelligible] cant get back in the country because they took away his visa so Im going to meet with you. And he said we have the guards downstairs because Boris car was bombed last night and the reason we dont have any people here, is we have a bomb threat in the office. I said to the guy, you could have called us up and we could have had breakfast in the hotel. True story. STUdENT: What are your personal and professional goals? Where do you see yourself in five years? DAVid TEPPER: You mean, what do I want to do when I grow up, is that what youre asking? (Laughter.) You guys are right at the beginning [of your careers], its really great to be you. I still have one kid in high school. Professionally Im trying to [hire] some other people in the firm so that they can do other things and I can actually do some more outside interests. I was actually trying to hire somebody before I came up here today. (Laughter.) Ive always tried to have a balance, so Ive kind of met some of those goals. I want to continue to have a balance. I always promised myself Id be a social worker. Its what I always say Ill do when I grow up, so I probably want to get a little bit more involved with different charities.


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STUdENT: What kind of advice do you have for students that arent pursuing a career in Wall Street, or in finance? DAVid TEPPER: Like I said before, just figure out what you want to do and do it. I mean, a lot of people who go to Wall Street, they hopefully want to do that or have some inkling about markets and arent doing it for money. Not that moneys a bad reason to do it, but its good to have some inkling of what you want to do. And like I said before if you can figure out what you want to do, go for it and if you cant, youll figure it out at some point and then go for it. STUdENT: What would be your advice on managing your time between family and work? DAVid TEPPER: If you skip some family thing, you wont get it back. If I do a trade, Ill do another trade. I can always do that. But if I miss some big family event, I cant get it back. You think you can get it back when youre younger. When I was at Goldman Sachs it was hard to get home for things; thats one of the reasons I decided to leave, too. You cant always do it, but if you can do it, I think it has to be first [priority], because you cant get it back. And the things in your career you can get back. Sometimes I cant do it all, but if I can, Ill do it. I think thats been a great decision in my life. It really is a good decision, to really put personal things, family first, if you can do it. And sometimes you just cant, okay. You really just cant, but you know, make it up if you cant. Try to make it up, because thats what lifes about.

STUdENT: Any thoughts on todays markets, how is Appaloosa investing and [unintelligible]? DAVid TEPPER: Right now were pretty cautious. We actually have the biggest cash position weve ever had. Were probably about 40 percent in cash and we never run cash. The reason Im that way is because I do think margins are shrinking. A lot of industries started with sub-prime. So Im pretty cautious, and on the other hand, Im nervous to be short, because theres so much liquidity and the Fed may continue to ease rates, so you can get a liquidity-driven market. I actually think that were in this period similar to like 98, 99, 2000, when the NASDAQ bubbled up. This bubble right now is happening in Hong Kong, in Brazil, in their stock markets Chinas stock market. You get this bubbling up thats caused by our monetary policy. So were in cash, because I dont like margins coming down. I think profitabilitys going to be hurt, but at the same time, Im nervous about the Fed easing. If it was a normal easing period you could be in there, but I think youre in that 98, 99, 2000 period. In that period, you had over-capacity in tech companies because of easy money. We talked about the crisis in 98 before, and Y2K. They eased money further, so you had money flowing in from the Fed. You couldnt say it was a policy mistake of some sort. Money flowed in and the NASDAQ bubbled up and then it crashed. And it crashed mostly because of over supply capacity. Im of the opinion that you could have a similar situation right now, that even though you have margins down, you could have so much liquidity from Fed easing in our market. And whats happening is theyre building too much capacity in China in everything.

Im not short, because Im nervous about the liquidity. The market can go up, so thats why I have this cash, which is a great hedge. Ill tell you this: its the best hedge; nothing else is as great a hedge. You can learn anything you want at Carnegie Mellon, Im telling you right now, you cant hedge yourself like being only cash at a time. STUdENT: What do you think about the airline industry right now? I mean, do you have airlines at all? DAVid TEPPER: We used to own 5 percent of Continental at some point a few years back. We generally, in a way, like the airline industry. We like it. In the United States youre talking about, right? High jet fuel prices are a little bit of a drag and the economy is a bigger drag if you have a problem with people not having money, because heating oils so expensive, because theyre losing their houses; that can be a problem too, you know, for that investment. But the reason we kind of liked it is because the order backlogs so big right now. The domestic industry cant order planes, so it will keep supply a little bit tighter. Whats happened in the domestic industry over a time period has been that theyve always overordered and their margins got killed. Because theres such a queue, because of emerging markets, right now they cant get planes, so its keeping supply tighter so they can charge more, effectively. Countering that is high oil prices. Much more problematic is Im going to point to the sub-prime guy again. Potentially theres job losses, people losing their houses thats going to affect the consumer demand. If youre looking at the industry, look at their planes and I dont know where it is; I havent looked at the industry


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for about six months now, but look at that, where the queue is for them ordering planes. And try to figure out how our consumer demand is. Not consumer demand just for [air travel], but consumer demand just generally in the economy. DAVid TEPPER: Alright, thank you guys.