Presentation to the Institute of International Bankers Charles Roxburgh

1. Competitive Strategies in Wholesale Financial Markets and Proposals to Restructure the U.S. Regulatory System Presentation to the Institute of International Bankers Charles Roxburgh

2. Three topics • Scenarios for future of global capital markets • Competitive strategies in response • Possible directions for regulatory reform

3. 301 2007 was set to be another record year – but then it all went wrong . . . $ Millions • Global capital markets revenues* -15% +29% +17% 267** 25** (4Q) 244 46**(3Q) 209 198** (1H) 2004 2005 2006 Post-write-downs – 2007 * Sales and trading, ECM, DCM, loan origination and syndication, and M&A revenues ** Estimates based on results of ten Global players, which may over-state total industry growth in first half given relative out-performance by leading firms, plus third quarter actual results and mix of actual and estimated fourth quarter results for leading firms scaled up to give industry totals Source: McKinsey Global Capital Markets Revenue Pools; Company reports, McKinsey estimates

4. Securities firms revenue Absolute revenues below corresponding quarter in previous year Q1 1980 Before looking forward, let’s look back . . . U.S. securities industry financial results* End Q1 1980 value indexed to 100 (quarterly figures) Q1 2001 – Q2 2005 “9/11 and TMT collapse” Duration of decline – 9 quarters % max. fall – 43.0% Time to recovery – 19 quarters Q3 1998 – Q3 1999 “Emerging markets crisis” Duration of decline – 1 quarter % max. fall– 15.2% Time to recovery – 5 quarters Q1 1994 – Q4 1994 “U.S. interest rate hike” Duration of decline – 2 quarters % max. fall – 15.8% Time to recovery – 4 quarters Q2 1987 – Q1 1989 “Black Monday” Duration of decline – 3 quarters % max. fall – 33.5% Time to recovery – 8 quarters 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 * Extracted from aggregated income statement, selected balance sheet, and employment data on the U.S. domestic broker-dealer operations of all NASD and NYSE member firms doing a public business derived from their Financial and Operational Combined Uniform Single (FOCUS) Report filings Source: SIFMA; McKinsey analysis

5. Last September, we defined four possible scenarios for the future . . . Description Bounce Back • The credit and liquidity crunches turn out to be a short-term blip • 2007 H2 is tough but 2007 remains a record year, revenue growth reverts to long term trend from Q1 2008 onwards Steady Recovery • Some players keep struggling in credit in the remaining of 2007, but no major downturn in economy • After identifying all effects and losses due to the current turmoil, capital market revenues growth picks up in 2008H2 The Long Chill • Weakened consumers confidence due to the US housing market downturn leads to a mild dip of economy in early 2008; slight up-tick in default rates hits credit markets • Further interest rate cut in mid-2008 rescues markets, but it takes one year for growth revival Late Tackle • Liquidity support by central banks and continued consumer confidence maintain markets’ stability and growth until around mid-2008 • Inflationary pressures accelerate given loose monetary policy. Fed reverses policy and triggers 2-3 quarters of recession from mid to end 2008 Source: McKinsey

6. 46 . . . which we have now narrowed down to two main scenarios $ Millions Total & CIB revenues Steady Recovery • Benign "soft landing" and quick economic recovery in 2008 • Deal pipelines temporarily dry out creating 3-4 quarters of negative growth in credit, but recover in H2 2008 • Europe and Emerging markets remain strong +6% 2005 06 07 08 09 2010 The Long Chill • Early, mild recession in 2008 • Structural change in credit markets • Continued growth in selected asset classes • Strong growth ex-US -1% 267 2005 06 07 08 09 2010 Note: 2007, 2008, 2009 results include estimated write-downs & write backs Source: McKinsey Global Capital Markets Revenue Pools; McKinsey estimate

7. What will be the next shoe to drop? • Monolines? • Commercial Real Estate? • Leveraged Loans? • Sub-prime “Round 2”? • Litigation? • Regulatory over-reaction? Source: McKinsey

8. There are common trends across all scenarios Regional balance • Emerging markets likely to outgrow developed markets • Western Europe likely to extend lead over North America in terms to total capital markets revenues • North America lags behind Product trends • Commodities and Equity Derivatives with strong prospects under all scenarios • FX, Rates & Cash Equities as winners in "lighter crisis" scenarios and still relatively resilient in steeper crisis • Permanent loss of some revenue pools (esp. structured credit) • Continued attractiveness of annuity-like transactional products Source: McKinsey

9. 40 Global revenue pools are likely to shift away from the US Estimated revenue mix by region Percent 100% 4 5 Japan Non-Japan Asia Other emerging markets North America Western Europe 2005 2010 possible scenario Source: McKinsey Corporate and Investment Banking Practice Industry Scenarios

10. Three topics • Scenarios for future of global capital markets • Competitive strategies in response • Possible directions for regulatory reform

11. Three priorities for maximizing value through a potential downturn Reconfirm & recommit to long term strategy • Continue investment throughout the cycle in strategic priorities • Build emerging markets franchises • Undertake 'no regret' reviews of risk process, capital allocation and non-compensation costs Remain committed to clients and talent • Deepen client relationships, forged through adversity • Re-structure compensation to reward commitment of top talent and strengthen link to long term value creation • Maintain active recruiting strategy at all levels • Reinforce meritocracy Invest in the next waves of innovation • Drive product innovation, e.g., insurance securitization, carbon trading, • Capture convergence opportunities e.g., with asset management • Improve “R&D” and streamline new product development processes • Innovate business and operational models for productivity and efficiency

12. Three topics • Scenarios for future of global capital markets • Competitive strategies in response • Possible directions for regulatory reform

13. 153 More attractive About the same Less attractive In 2006 there was growing pessimism about the prospects for New York City as a financial center relative to London Do you believe this city will become more or less attractive over the next 3 years? Ranking by response Percent 54 15 44 38 8 41 New York City London Source: McKinsey Financial Services CEO Survey

14. Which regulatory environment is more business-friendly? Regulation was an area of particular concern Ranking by responsePercent 2 U.S. is much better 3 5 2 2 1 U.S. is somewhat better 23 16 14 13 13 13 About the same 45 43 45 42 33 31 26 U.K. is somewhat better 31 32 32 34 35 U.K. is much better 4 7 8 12 14 19 Rules InspireInvestorConfidence Clarity of Rules Fairnessof Rules Uniformityof RegulatoryEnforcement Simplicity ofRegulatorySystem Cost of OngoingCompliance Source: McKinsey Financial Services CEO Survey

15. Several reports helped created a consensus on the diagnosis…. Source: McKinsey

16. + + + + ü Supports . . . and a consensus is emerging on some issues . . . Drafting Bloomberg-Schumer CCMR Chamber Roundtable Treasury ? Principles-based regulations ü ü ü ü ? Better regulatory coordination ü ü ü ü ? Prudential supervision ü ü ü ü ? Securities litigation reform ü ü ü ü Accounting reforms/IFRS ü ü ü ü ü SOX reforms ü ü ü ü ü Source: McKinsey

17. + + ü Supports . . . and a consensus is emerging on some issues . . . Drafting Bloomberg-Schumer CCMR Chamber Roundtable Treasury ü ? New & modernized charters National Commission to study further Regulatory structure rationalization/ consolidation National Commission to study further ü ? Immigration reforms for skilled talent, business travellers ü ? Source: McKinsey

18. U.S. now faces a clear choice – bold reforms • Clarify financial market objectives • Move to principles-based and prudential regulation • Enhance regulatory coordination • Reform securities litigation • Modernize charters • Streamline and consolidate agencies • Continue accounting and auditing reforms • Improve immigration policies to ensure needed skills Source: McKinsey

19. U.S. now faces a clear choice – bold reforms . . . or just muddle through • No clear national objectives • Continue rules-based regulation with emphasis on enforcement • Rely on ad hoc, reactive coordination among agencies • Keep litigious legal environment • Leave charters unchanged • Maintain current complexity and overlap at national and state level • No further accounting or auditing reforms • Leave immigration unchanged • Clarify financial market objectives • Move to principles-based regulation & prudential supervision • Enhance regulatory coordination • Reform securities litigation • Modernize charters • Streamline and consolidate agencies • Continue accounting and auditing reforms • Improve immigration policies to ensure needed skills Source: McKinsey

20. Some predictions . . . • Current market environment will dominate Congressional and regulatory debates in near term, understandably postponing needed reforms even where there may be growing consensus • More evidence of eroding US competitiveness could drive some consensus reforms this year as a “regulatory stimulus” response before the 2008 elections – e.g. • Principles-based regulation and national standards • Better regulatory coordination …..but need to avoid risk of regulatory over-reaction to current issues • Longer-term reforms – new charters, streamlined and consolidated agencies, securities litigation reforms, immigration reforms – will likely await new Administration and new Congress in 2009-2010 and beyond. Source: McKinsey

21. Competitive Strategies in Wholesale Financial Markets and Proposals to Restructure the U.S. Regulatory System charles_roxburgh@mckinsey.com Presentation to the Institute of International Bankers