1. Advanced Risk Issues Summary and Observations Dallas, Texas October, 2007

2. Risk Management and Revenue Growth in a Complex Global Bank
Advanced Risk Issues
Risk Management and
Revenue Growth in a
Complex Global Bank

3. What are the risk issues that are of prime concern to Citi today?
Advanced Risk Issues
Why Were We Here?
What are the risk issues that are of prime concern to Citi today?
How is Citi managing risk today?
How do risk management and business management work together to drive shareholder value?
To help remind you what you already know about risk management and analysis!
And, to remind you that great bankers are skeptical by nature

4. Lessons Learned……. Why do smart bankers sometimes do bad deals?
Mistakes about the use of Citi’s capital – risk / reward
Missing the most important risk decision - Choose clients very carefully
Lack of understanding of industry dynamics and risks
Lack of understanding of client’s motivation for doing a deal
Pressure to generate revenue
Going along with the “herd”
Ignoring the credit risk component of all risk products

5. Moody’s 2005 Securities Industry Outlook
“For all global trading and market-making firms, highly- skilled risk management - broadly defined - is an absolute necessity for the business model.
“A robust corporate culture remains critical for balancing short-term competitive pressures and the long-term interests of a franchise.
In a hotly competitive arena, fraught with litigation and regulatory risk, an investment bank needs a collective sense of right and wrong.

7. Moody's Investors Service upgrades the ratings of Citibank N. A
Moody's Investors Service upgrades the ratings of Citibank N.A. to Aaa for long-term deposits and to A for financial strength September 26, 2006
The firm has made progress on strengthening culture and improving controls, and has not suffered a major control problem since having to close its Japanese private bank.
However , management must continue to solidify cultural change, notwithstanding shareholder pressure for earnings growth
Moody's assessed the effectiveness of risk controls, measurement and information infrastructure as well as the firm's risk governance and culture.

8. “Credit Matters Today”
March 5, 2007
Strong earnings generation from an extraordinarily diverse set of businesses allows Citigroup Inc. (Citi; AA/Stable/A-1+) to cover some of the high risks that it incurs.
Citi has also achieved a substantial change in its control environment in the aftermath of a wave of heavy litigation expenses and criticism of its business practices from regulators around the world.

9. Survey of International Banking – May, 2006
Banks the world over are scrambling to become larger…
But at some point diseconomies of scale will also start creeping in, with management finding it harder to summarize everything that is going on in the bank
This includes the neglect of concealed risks and the failure of internal controls
This problem afflicted Citigroup in 2002 – 2005 when it was rocked by a string of compliance problems
Risk management is the rock on which any contemporary bank rests….

10. The alchemists of finance – May, 2007
Global investment banks are taking ever more risk, and are devising ever more sophisticated ways of spreading it

11. Credit Risk Supervision – Sabeth Siddique May, 2007
It is “unsafe and unsound” to be in credit risk trading without an understanding of the risks being traded
Banks should not be trading credit risk on “technical factors”
There is a large, new risk – “Pipeline” Risk. The risk that a market event will dry up liquidity in the middle of a syndication or creation of credit default protection

12. Banks in trouble
The game is up
Aug 16th 2007

13. Regulators rethink bank rules
Headlines
September 20, 2007
Regulators rethink bank rules
The treasurer of one big investment bank admits: "What we are seeing now is like a natural disaster - whole parts of the financial system which we took for granted have stopped working. But that was not something that people had really prepared for."
Until now regulators have generally tolerated - if not actively encouraged - this "originate and distribute" trend, since there was a widespread belief that the financial system would be safer if credit risk were spread around.
However, this summer's events have shattered some of these comforting assumptions.
Although banks have shoved risk out through the "front door" (as evidenced in their published accounts), they have been re-acquiring it in other, indirect - or backdoor - ways.

14. Good Risk Management is a Driver of Revenue Growth

15. Advanced Risk Issues Monday Sept 17 – Participants’ Risk Concerns
Managing opportunities to grow market share
Lack of investment in technology to monitor risk
Execution risk
Process flow from origination to closing
Systems – time consuming manual fixes
Adverse selection in growth of business
Process
Recruiting and staffing – challenge to attract “A” players
Process is an impediment to business growth – timeliness of decision making and MIS
Market segmentation vs skills of the bankers
Market perception and “herd” mentality
Reputation risk relative to client and staff acquisition
Execution risk
Systems and operational risk

16. Advanced Risk Issues Course Overview
Basic Credit Risk Analysis
Industry Structure and Company Risk Analysis
Balancing Business Risk and Financial Risk (Key Success Factor Exercise)
Identifying Winners and Losers.
Framework for a common sense approach to make independent relative risk ratings
Early Warning Signs / Problem Recognition

17. Advanced Risk Issues Course Overview
Assessing management ability, business strategy, and controls
Management Competence and Business Strategy (Corning Case)
Business Controls (Citibank Dublin Case)

18. Advanced Risk Issues Course Overview
Deal Structure and Risk
- Poland A2 Motorway Case
Converging Risk Issues – Credit Risk, Market Risk, Derivatives Risk
How Does Citi manage risk?
Underwriting risk and conflict management
Market risk / Convergence Risk

19. ARI Presentations – “Seeing Around Corners”
CBG Risk Management – Nancy Shanik, John Gilliland
Citi / CBG Management – Jorge Bermudez
Conflict Management / Franchise Risk – Rashmini Yogaratnam
Market Risk / Convergence Risk – Murray Barnes
Problem Recognition / Early Warning Signs - John Dowd
Company and Industry Analysis – Arnie Ziegel
Derivatives Risk – Patrick Pancoast

20. Advanced Risk Issues Quotes of the Week
People act in their own economic interests
Nancy Shanik
There’s no amount of revenue that can make up for a bad loan
Jorge Bermudez, Bob Druskin
Deregulation is a horrible thing for a creditor
John Dowd
What’s the value of credit analysis or credit analysts if the market tells us what the risk is?
Patrick Pancoast
I bought this, but you shouldn’t have sold it to me
Rashmini Yogaratnam
Your initial is your initial, my initial is my initial
Jorge Bermudez
Who’s fault is it? It’s yours – you gave me the money, you let me do the trade, you told me to invest
Arnie Ziegel

21. Advanced Risk Issues Quotes of the Week
In the long run, treating customers fairly has proven to be good business
Rashmini Yogaratnam
When liquidity conditions deteriorate, market risk becomes credit risk and, when liquidity completely disappears, all risks converge
Murray Barnes
It was easier to get approved because it was harder to understand
Patrick Pancoast
My best risk manager is a well balanced risk manager
Jorge Bermudez
Management's tolerance for loss is not the same as tolerance for risk
Don’t mix high business risk with high financial risk
Arnie Ziegel

22. Advanced Risk Issues Quotes of the Week
Companies go bankrupt because they 1) run out of cash, 2) fear that they’ll run out of cash, or 3) their suppliers of liquidity fear that they’ll run out of cash
Arnie Ziegel
The unknown unknowns, known unknowns
Murray Barnes
Many business problems or losses are the result of flawed business strategies
Funding long-term, illiquid assets with short-term money is a high risk strategy, irrespective of the credit quality of the assets
If you can’t mark to market, you mark to model. If you can’t market to model, you mark to guess. And we guess very professionally
Patrick Pancoast

23. Advanced Risk Issues Quotes of the Week
Choose your clients carefully
Arnie Ziegel
Why is it that we do not ask as many questions when we make money as when we lose money?
Murray Barnes
Trust and verify
Jorge Bermudez, Dave Bushnell
Affirmative risk taking is awareness of the risks you’re taking – with your eyes wide open!
Nancy Shanik
I would rather get fired for not making my revenue target than making it for two years and then have my portfolio blow up!
Jorge Bermudez

24. Why Were We Here?
Excellent risk management creates shareholder value and can be a major driver of high quality revenue growth
Taking risk is one thing, managing risk is another
Excellent risk management for revenue growth requires:
“Seeing around corners” - finding risk where we didn’t know or think it existed, and the convergence of types of risks, along with the associated opportunities
Skepticism to balance risk with the need to generate revenue growth
Identifying potential flaws of business strategies – internal and clients
Understanding the increasing complexity of products

25. Why Were We Here?
Excellent risk management for revenue growth requires:
Understanding the reputation and franchise implications of business decisions – each decision often impacts multiple constituents – issuers and investors, regulators, shareholders
Understanding that we will never see all risks, so we
Don’t assume that what we distribute, or plan to distribute, can’t come back
Structure away from risk
Choose clients carefully
Pursue active portfolio management
Create and maintain a superb control culture and business culture
Create and maintain systems for monitoring risk

26. Why Were We Here?
To recognize that risk, product, and coverage can generate the most shareholder value by working together
To review what risks Citi is taking or facing, and how Citi is managing risk
Growth demands MORE risk and MORE reward, and it’s up to you to get the balance right
We can grow and still “stick to the fundamentals”
Credit risk analysis is truly at the heart of all risk analysis
To remind you that excellent bankers don’t hesitate to say “I’m sorry, but I just don’t understand….”
To recognize that Citi is held to a higher standard, not just because Citi is big, but because Citi is the leader……………

27. Advanced Risk Issues 2007 Seeing Around Corners
Risk Management and Revenue Growth
in a
Complex Global Bank