CONFIDENTIAL New York, May 2008 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion. New York’s future competitiveness as a global financial center Presentation to the Council on Foreign Relations Charles Roxburgh

McKinsey & Company | 1  New York vs London – the view in 2006  Recent developments  Priorities to retain competitiveness Three topics

McKinsey & Company | 2 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? More attractive About the same Less attractive New York City London Ranking by response Percent Source:McKinsey Financial Services CEO Survey

McKinsey & Company | 3 Regulation was an area of particular concern Source:McKinsey Financial Services CEO Survey Which regulatory environment is more business-friendly? U.S. is much better U.S. is somewhat better About the same U.K. is somewhat better U.K. is much better Rules Inspire Investor Confidence Clarity of Rules Fairness of Rules Uniformity of Regulatory Enforcement Simplicity of Regulatory System Cost of Ongoing Compliance Ranking by response Percent

McKinsey & Company | 4 Several reports helped created a consensus on the diagnosis…. Source:McKinsey

McKinsey & Company | 5... and a consensus has emerged on necessary actions….. Supports Drafting+ Principles-based regulations Better regulatory coordination Prudential supervision Securities litigation reform Accounting reforms/IFRS SOX reforms CCMR Bloomberg- Schumer ChamberRoundtableTreasury Source:McKinsey ?

McKinsey & Company | 6... and a consensus has emerged on necessary actions….. Supports Drafting+ CCMR Bloomberg- Schumer ChamberRoundtableTreasury New & modernized charters National Commission to study further + Regulatory structure rationalization/ consolidation Immigration reforms for skilled talent, business travellers Source:McKinsey National Commission to study further ?

McKinsey & Company | 7  New York vs London – the view in 2006  Recent developments  Impact of the Crisis  Developments in London  Priorities to retain competitiveness Three topics

McKinsey & Company | 8 Industry revenues pools 2006 – or, where was the money being made? Commodities 3 Credit DCM ECM M&A US FX Rates Europe Prop Trading 7 Sec Lending Equity Derivatives Cash Equities Primary Secondary Fixed Income Secondary Equities

McKinsey & Company | 9 Where has the crisis hit…… Commodities 3 Credit DCM ECM M&A US FX Rates Europe Prop Trading 7 Sec Lending Equity Derivatives Cash Equities Primary Secondary Fixed Income Secondary Equities Revenues from primary and secondary credit  34% of US  20% of Europe

McKinsey & Company | 10 Three scenariosSteadyrecovery  US & UK recessions short and mild; Europe escapes slow-down and Asia remains decoupled  Credit markets recover in H2 2008; low prices attract sophisticated buyers; liquidity and confidence returns  Limited additional credit losses in Q and beyond (~$ bn)  Securitization volumes pick up in H2 2008; full recovery by 2010  Investment bank earnings bounce back in 2009 Longchill  US & UK experience moderate 2 – 3 quarter recessions; Europe and Asia slow but avoid full recession  Credit markets remain depressed throughout 2008 and first half 2009  Total US credit losses in mid range (~$800-$900 bn)  Securitization recovers in 2009, but largely “vanilla” structures  Further capital raising by banks to repair balance sheets  Some minor banks require rescue/bail-out Protracted workout  US & UK experience prolonged recessions; Europe and Asia become coupled given slow down in world trade  Credit markets remain depressed throughout 2008 and 2009  Total US credit losses toward top of range (>$1 trillion)  Securitization doesn’t recover and banks unable to expand lending to fill gap; shortage of credit exacerbates economic slowdown  Large scale capital raising by banks; further government interventions

McKinsey & Company | 11 Industry revenues under "The Long Chill" scenario % Western Europe North America Lat.Am., CEEMEA Non-Japan Asia Japan 299* Note:2007 and 2008 results include estimated write-downs Source:McKinsey Global Capital Markets Revenue Pool, team estimate Projected revenue from Global, $ Billions Pre-write-down result 229

McKinsey & Company | 12 REGIONAL MIX OF GLOBAL REVENUES BY SCENARIO IN 2010, PERCENT OF GLOBAL TOTAL $ Billions "Steady Recovery" "The Long Chill" A shift towards emerging markets is observed under all scenarios Japan Non-Japan Asia Lat.Am, CEEMEA North America Western Europe Source:McKinsey Global Capital Markets Revenue Pool, team estimate

McKinsey & Company | 13 Developments in London  Weaknesses exposed in UK regulatory structure ▢ Lack of clarity in ‘Tri-partite structure’ ▢ Northern Rock crisis  Proposed tax reforms undermine ‘pro-business’ image ▢ CGT ▢ ‘Non-dom’ status ▢ Corporation Tax  Growing concern about competition from other centers ▢ Asia ▢ Middle East ▢ Europe

McKinsey & Company | 14  New York vs London – the view in 2006  Recent developments  Priorities to retain US competitiveness Three topics

McKinsey & Company | 15 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

McKinsey & Company | 16 U.S. now faces a clear choice – bold reforms... or just muddle through  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  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 Source:McKinsey

CONFIDENTIAL New York, May 2008 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion. New York’s future competitiveness as a global financial center Presentation to the Council on Foreign Relations