1. Overview 2. Investment banking 3. Trading 4. Asset management Investment Banking 1 L9: Overview on Investment Banking

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Overview The investment banking industry was transformed during 2008 when five large US pure-play/non-deposit taking firms experienced the following events: Bear Stearns was sold to JP Morgan Lehman Brothers filed for Bankruptcy protection and then sold its US operations to Barclays and European and Asian businesses to Nomura Merrill Lynch was sold to Bank of America Goldman Sachs converted to a bank holding company Morgan Stanley converted to a bank holding company 3 L9: Overview on Investment Banking

Key Problems During 2008 Investment banks were over-reliant on short-term financing (>40% of total liabilities): largely repurchase agreements (repos) and commercial paper (CP) A repo provides financing when a bank sells securities and agrees to repurchasing them the next day or week at a higher price (the buyer can sell securities in the market if the seller is unable to repurchase) CP is unsecured financing that has a maturity of up to 270 (most CP matures in 90 days) Benefits of CP and repo funding (during normal markets) include: cheap, liquid, flexible and, substantial earnings power in upward sloping yield environment when use to purchase long term assets Risks include: refinancing risk and asset/management liability mismatch, resulting in potential bankruptcy threat if need to sell unfunded assets because can’t replace short-term funding Investment banks were over-leveraged: total assets to equity leverage ratios were 26x at Goldman Sachs; 31x at Lehman; 32x at Merrill Lynch; 33x at Morgan Stanley and 34x at Bear Stearns Investment banks suffered large mortgage securities related losses in their proprietary trading, underwriting and asset management areas 4 L9: Overview on Investment Banking

Following the 2008 transformation of the investment banking industry, Goldman Sachs and Morgan Stanley operated based on the same business model employed by larger universal banks, including: Leverage dropped from 30x to 12x Return on equity dropped from >25% to <15% Short term borrowings from repos and CP significantly reduced Risk based capital increased Proprietary and principal investment activities reduced Additional regulatory controls imposed Access to discount window and FDIC guarantees New Landscape 5 L9: Overview on Investment Banking

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Investment Banking Division 9 L9: Overview on Investment Banking

Investment Banking Division 10 L9: Overview on Investment Banking

Investment Banking Division 11 L9: Overview on Investment Banking

Investment Banking Division 12 L9: Overview on Investment Banking

Investment Banking Division 13 L9: Overview on Investment Banking

Trading Division Fixed Income, Currencies and Commodities (FICC) Business Government Bonds, corporate bonds, mortgage-related securities, asset-backed securities Commodities and foreign exchange Equities Business Common stock Convertible securities 14 L9: Overview on Investment Banking

Trading Division Responsible for all investment-related transactions with institutional investors, including financial institutions, investment funds and cash management arms of governments and corporations Make markets and clear on exchanges Responsible for principal investments for the firm’s own account (usually in partnership with the Banking Division) Trade derivatives as well as underlying (cash) securities Engage in proprietary trading Provide research to investing clients 15 L9: Overview on Investment Banking

Trading Division Client Related Trading Help investing clients make money while the firm also achieves trading profits Primary and secondary market trading activity Proprietary Trading (for the firm’s own account) Similar to the trading activities of hedge funds Financial reform legislation will likely reduce proprietary trading over time 16 L9: Overview on Investment Banking

Asset Management Division 17 L9: Overview on Investment Banking

Asset Management Division Asset Managers manage money for clients brought in my Private Wealth (PW) advisors PW advisors help investing clients allocate investment funds Asset Managers receive fees from managing money and then share these fees with PW advisors Asset Managers and PW advisors at investment banks compete with other large money managers such as Fidelity and Putnam, and with hedge funds and private equity funds Asset Managers manage stock, bond, FX, commodity and real estate funds, as well as funds focused on hedge fund and private equity fund-type investments 18 L9: Overview on Investment Banking