Competitive Strategies in Global Wholesale Financial Markets

1. Competitive Strategies in Global Wholesale Financial Markets Annual Washington Conference of the Institute of International Bankers March 5, 2007

2. TODAY’S DISCUSSION • Competing in wholesale financial services • NY/US competitiveness as a market

3. TODAY’S DISCUSSION • Competing in wholesale financial services • Strong starting point • Opportunities going forward • How are players positioned? • NY/US competitiveness as a market

4. STRONG STARTING POINT • The growth and optimism of 2004 and 2005 has continued through 2006 . . . • Banks have been firing on all cylinders • Advisory and underwriting at record highs • Equity markets experiencing strong growth • Rising asset prices make making money easy • Ever-growing demand for structured credit • Plentiful capital flowing into alternatives • Favorable macroeconomic conditions across the globe

5. 11.5 BANKS HAVE PRODUCED EXTRAORDINARY RESULTS • Top 10 corporate and investment banks • Revenues, • 2005, • $b • Revenue CAGR, • 04-1H06, • % • ROE, • 2005, • % • Profit CAGR, • % • 23.9 • 15.7 • 24.0 • 8.8 • 21.8 • 39.4 • 21.8* • 48.6 • 19.8 • 27.1 • 18.0 • 59.3 • 15.7 • 28.8 • 24.2 • 38.7 • 14.6 • 21.1 • 18.0 • 12.3 • 14.1 • 60.5 • 27.6* • 18.0 • 13.9 • 29.2 • 16.0* • 32.2 • 12.7 • 27.4 • 21.6* • 35.7 • 12.2 • 31.1 • 16.2 • 73.7 • 11.5 • 13.9 • 16.8* • 8.9 • 10-year growth rate • * ROE for entire organization; does not report ROE for CIB division • Source: McKinsey Global CIB 50, company filings

6. 5.2 UNDERLYING IT ALL, FINANCIAL STOCK GROWTH CAGRs (2001-05), Percent • Private debt • Non-Japan Asia • UK • Eurozone • U.S. • Equities • Non-Japan Asia • UK • Eurozone • U.S. Source: McKinsey Global lnstitute

7. 15 EUROPE NOW ALMOST AS LARGE IN REVENUES AS AMERICAS, ASIA WITH FURTHER POTENTIAL • 2005 Capital Markets revenue • Estimated revenue growth* • %, 2004–2005 • EMEA • Non-JapanAsia Pacific • Japan • Americas • Penetration (revenues/GDP) bp, 2005 * Average of range is shown Source: McKinsey Global Capital Markets Revenue Pool, Global Insight (World Market Monitor, 28.08.2006), team estimates

8. 24 LARGE GLOBALS DOMINATE THE AMERICAS, OTHER REGIONS ARE MORE BALANCED • Global players • Aspiring globals and Major regionals • Capital markets revenues, %, 2005, global figures • National champions • Exchanges • Non-Japan Asia Pacific • $20 billion • Americas • 100% = $92 billion • EMEA • $85 billion • Japan • $ 16 billion • 25 • 29 • 44 • 30 • 33 • 40 • 49 • 18 • 24 • 9 • 63 • 3 • 3 • 24 • 3 • 3 Source: McKinsey Global Capital Markets Revenue Pool

9. 4 • Flow Derivatives • FX • Equity Derivatives • STIR/MM • Exotic Rates BOTH AMERICAS AND EMEA WITH PRODUCT STRONGHOLDS • Fixed income Total capital market revenues, USD billions, 2005, Global figures • Equities • Americasrevenues • Institutional Cash Equity 15 • Securitization • Securitization • Flow Credit • Flow Credit 10 • Flow Derivatives • Benchmark Bonds • FX 5 • Commodities • Commodities • Equity Derivatives • STIR/MM • Exotic Credit • Exotic Credit • Convertibles • Convertibles • Exotic Rates • Brokerage Execution 0 0 2 4 6 8 10 12 14 16 • EMEA revenues Source: McKinsey Global Capital Markets Revenue Pool

10. 60 IN PARTICULAR, EUROPE CAPTURES MOST OF THE FLOW AND STRUCTURED DERIVATIVES REVENUE 2005 Revenues $ Billions, percent • 100% = • $26 • $26 • 6% • APAC • 8% • 9 • Japan • 8 • 25 • Americas • 32 • 60 • Europe • 52 • Flow derivatives • Structured derivatives Source: McKinsey Global Capital Markets Survey

11. Increasing scale of capital markets • Trading and risk management increasingly important • Margins compressed and capital commitment required to compete for accounts • Excess capacity and capital in the industry at large • Marginal costs fall to zero, making scale critical • Technological advancements continue • Increased scrutiny of dealer risk monitoring of client exposures and conflicts when acting as principal • Relentless regulatory push for greater transparency • Disciplined and focused client service a must • Revenue increasingly concentrated in a smaller number of mega deals and fewer clients • Pressure to hire top talent particularly in structured product areas • Broader product suites needed to create sustainable returns and buffer against down cycles • Strategies diverge with losers caught in the middle • Players that cannot leverage scale or scope forced to compete on skill, driving specialization WHERE THE WHOLESALE BANKING MARKET IS HEADED • Market developments • Implications for players

12. KEY INITIATIVES FOR 2007 • Where to compete Penetrate key client segments • 1. Focus on providing coordinated service to increasingly demanding hedge fund and financial sponsor client segment • 2. Should you compete for the middle market? Build out or expand product offerings • 3. Lead the innovation in new risk management products • 4. Build out structured product capabilities across asset classes Explore new geographies • 5. Pursue effective and efficient geographic expansion – localization will be increasingly important • 6. China and India: Still the next big thing; Great Crescent? • How to compete • 7. Provide distinctive client service through a targeted and disciplined approach Serve clients better Build the best infrastructure • 8. Use cutting edge front-office technology as a competitive weapon • 9. Design the next-generation operating model • 10. Win the war for talent Deploy capital wisely • 11. Deploy capital for key clients while monitoring returns • 12. Invest in state-of-the-art risk management to ride the uncertainty

13. HOW ARE PLAYERS POSITIONED TO WIN? • Industrial legacy • Product-focused • Banking legacy • Regional powerhouse • Universal • Ideas and principal • Broker-dealer legacy • Efficient execution Source: McKinsey Global CIB Revenue Survey

14. TODAY’S DISCUSSION • Competing in wholesale financial services • NY/US competitiveness as a market

15. FINANCIAL SECTOR COMPETITIVENESS BECAME AN URGENT PRIORITY FOR KEY POLICY MAKERS IN 2006 • “Unless we improve our corporate climate, we risk allowing New York to lose its pre-eminence in the global financial services sector. This would be devastating for both our City and nation.” • Mayor Michael R. Bloomberg and U.S. Senator Charles E. Schumer • November 1, 2006, Wall Street Journal • “U.S. capital markets are the lifeblood of our economy.” • Treasury Secretary Henry M. Paulson • November 20, 2006, New York Economic Club • “America’s capital markets are the deepest, the broadest and the most efficient in the world. Yet excessive litigation and over-regulation threaten to make the financial markets less attractive to investors, especially in the face of rising competition from abroad. To keep America’s economic leadership, America must be the best place in the world to invest capital and do business.” • President George W. Bush, January, 2007, Federal Hall, New York

16. 153 CEOs BELIEVE LONDON’S NEAR-TERM FUTURE PROSPECTS ARE FAR BETTER THAN NEW YORK’S Ranking by response, percent • Do you believe this city will become more • or less attractive over the next 3 years? 0 9 54 Much more attractive 0 More attractive 15 About the same 44 38 8 0 Less attractive 41 Much less attractive 0 New York City London Source: Dealogic; year-to-date data compiled as of 11/02/2006. Source: McKinsey Financial Services CEO Survey

17. NEW YORK EXCELS IN TALENT BUT UNDERPERFORMS IN LEGAL AND REGULATORY Importance* High Performance gap, rating scale Medium Low • Deep and Liquid Markets • High Quality Transportation Infrastructure • Availability of Professional Workers • High Quality of Life (Arts, Culture, Education) • Low All-In Cost to Raise Capital • Effective and Efficient National Security • Availability and Affordability of Technical and Administrative Personnel • Reasonable Compensation Levels to Attract Quality Professional Workers • Close Geographic Proximity to Other Markets Customers and Suppliers • Government and Regulators are Responsive to Business Needs • Reasonable Commercial Real Estate Costs • Favorable Corporate Tax Regime • Openness of Immigration Policy for Students and Skilled Workers • Fair and Predictable Legal Environment • Workday Overlaps with Foreign Markets Suppliers • Attractive Regulatory Environment • Openness of Market to Foreign Companies • Low Health Care Costs * High importance factors were rated between 5.5-6.0 on a 7-point scale; medium between 5.0-5.4; low were less than 5.0 Source: McKinsey Financial Services Senior Executive Survey

18. ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS • Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth • External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets • Bloomberg-Schumer Report recommendations focused on ensuring U.S. and New York global financial services leadership

19. ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS • Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth • External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets • External factors naturally shifting benefit international markets • U.S. winning the war for talent for now, but losing on legal and regulatory environment • As a result, U.S. losing critical contested markets, with stark future absent change • Bloomberg-Schumer Report recommendations to ensure U.S. and New York global financial services leadership

20. ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS • Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth • External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets • Bloomberg-Schumer Report recommendations focused on ensuring U.S. and New York global financial services leadership • Critically important near-term priorities • Initiatives to enhance U.S. competitiveness • Important longer-term national priorities • Enhancing New York as a financial center

21. BLOOMBERG-SCHUMER REPORT RECOMMENDATIONS • Critically important near-term priorities • Provide clearer guidance on SOX implementation • Implement securities litigation reform • Develop a shared financial sector vision and guiding principles to set strategic direction • Initiatives to enhance U.S. competitiveness • Ease restrictions on skilled non-U.S. professional workers • Recognize IFRS now without reconciliation and promote faster convergence of international standards • Protect U.S. competitiveness under Basel II international capital accord • Important longer-term initiatives • Create independent, bipartisan National Commission on Financial Market Competitiveness • Modernize financial services charters and holding company structures • Enhancing New York as a financial center • Create a public-private joint venture focused exclusively on financial services Source: Bloomberg-Schumer Report

22. QUESTIONS?

23. Competitive Strategies in Global Wholesale Financial Markets Annual Washington Conference of the Institute of International Bankers March 5, 2007