1. 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

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

3. 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 44 15 41 London 38 8 54 Ranking by response Percent Source:McKinsey Financial Services CEO Survey

4. 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 45 23 2 26 4 31 35 19 13 2 42 32 12 13 1 45 32 8 13 2 43 31 7 14 5 Ranking by response Percent 33 34 14 16 3

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

6. 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 ?

7. 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 ?

8. 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

9. McKinsey & Company | 8 Industry revenues pools 2006 – or, where was the money being made? Commodities 3 Credit 120 123 DCM ECM M&A US FX Rates 21 6 10 Europe 12 5 9 5 Prop Trading 7 Sec Lending Equity Derivatives Cash Equities Primary Secondary Fixed Income Secondary Equities

10. McKinsey & Company | 9 Where has the crisis hit…… Commodities 3 Credit 120 123 DCM ECM M&A US FX Rates 21 6 10 Europe 12 5 9 5 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

11. 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 Q2 2008 and beyond (~$400-500 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

12. McKinsey & Company | 11 Industry revenues under "The Long Chill" scenario 13 96 107 51 11 2007 123 369 63 2006 315 126 122 2005 244 96 2008 +0% Western Europe North America Lat.Am., CEEMEA Non-Japan Asia Japan 299* 316 132 93 2009 299 125 91 2010 255 Note:2007 and 2008 results include estimated write-downs Source:McKinsey Global Capital Markets Revenue Pool, team estimate Projected revenue from 2006 - 10 Global, $ Billions Pre-write-down result 229

13. McKinsey & Company | 12 REGIONAL MIX OF GLOBAL REVENUES BY SCENARIO IN 2010, PERCENT OF GLOBAL TOTAL $ Billions "Steady Recovery" "The Long Chill" 18 10 29 39 430 2010 20 10 28 38 305 2010 A shift towards emerging markets is observed under all scenarios 39 248 2005 38 39 321 2006 35 40 373 2007 Japan Non-Japan Asia Lat.Am, CEEMEA North America Western Europe Source:McKinsey Global Capital Markets Revenue Pool, team estimate

14. 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

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

16. 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

17. 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

18. 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.com