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

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

2. 301
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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

3. Before looking forward, let’s look back . . .
LON-AAA
Before looking forward, let’s look back . . .
Securities firms revenue
Absolute revenues below corresponding quarter in previous year
U.S. securities industry financial results*
End Q value indexed to 100 (quarterly figures)
Q – Q2 2005
“9/11 and TMT collapse”
Duration of decline – 9 quarters
% max. fall – 43.0%
Time to recovery – 19 quarters
Q – Q3 1999
“Emerging markets crisis”
Duration of decline – 1 quarter
% max. fall– 15.2%
Time to recovery – 5 quarters
Q – Q4 1994
“U.S. interest rate hike”
Duration of decline – 2 quarters
% max. fall – 15.8%
Time to recovery – 4 quarters
Q – Q1 1989
“Black Monday”
Duration of decline – 3 quarters
% max. fall – 33.5%
Time to recovery – 8 quarters
Q1 1980
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

4. LON-AAA
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 Q 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

5. . . . which we have now narrowed down to two main scenarios46
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. . . 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

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

7. There are common trends across all scenarios
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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

8. Global revenue pools are likely to shift away from the US40
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Global revenue pools are likely to shift away from the US
Estimated revenue mix by region
Percent
100% 5 4
Japan
Non-Japan Asia
Other emerging markets
North America
Western Europe
2005
2010 possible scenario
Source: McKinsey Corporate and Investment Banking Practice Industry Scenarios

9. Three topics Scenarios for future of global capital markets
LON-AAA
Three topics
Scenarios for future of global capital markets
Competitive strategies in response
Possible directions for regulatory reform

10. Three priorities for maximizing value through a potential downturn
LON-AAA
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

11. Three topics Scenarios for future of global capital markets
LON-AAA
Three topics
Scenarios for future of global capital markets
Competitive strategies in response
Possible directions for regulatory reform

12. 153
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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
More attractive
About the same
Less attractive 15 44 38 8 41
New York City
London
Source: McKinsey Financial Services CEO Survey

13. Regulation was an area of particular concern
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Regulation was an area of particular concern
Which regulatory environment is more business-friendly?
Ranking by response Percent
U.S. is much better 2 5 3 2 1 2
U.S. is somewhat better 23 14 13 13 16 13
About the same 45 43 45 42 33 31
U.K. is somewhat better 26 31 32 32 34 35
U.K. is much better 4 7 8 12 14 19
Rules Inspire Investor Confidence
Clarity of Rules
Fairness of Rules
Uniformity of Regulatory Enforcement
Simplicity of Regulatory System
Cost of
Ongoing Compliance
Source: McKinsey Financial Services CEO Survey

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

15. . . . and a consensus is emerging on some issues . . .
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. . . and a consensus is emerging on some issues . . . ü
Supports +
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

16. . . . and a consensus is emerging on some issues . . .
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. . . and a consensus is emerging on some issues . . . ü
Supports +
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

17. U.S. now faces a clear choice – bold reforms
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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

18. LON-AAA
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

19. LON-AAA
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 and beyond.
Source: McKinsey

20. Presentation to the Institute of International Bankers
LON-AAA
Competitive Strategies in Wholesale Financial Markets and Proposals to Restructure the U.S. Regulatory System
Presentation to the Institute of International Bankers