1. Gerald A. Beeson April 14, 2008 Future of Financial Innovation PRESENTATION TO Financial Institutions Risk Management Conference

2. 2 Future of Financial Innovation There is much needed innovation within the derivatives market and many innovations of the past decade have been shut down, perhaps permanently, in risk transfer and funding  Derivative Markets  Continuing problems and hazards with respect to liquidity, transparency, valuation and counterparty credit risk  Securitization Markets  Continued impairment of the securitization market will hinder the transference of risk between providers of credit and pools of available capital  Funding Markets  Beginning to recover after the dislocations of Q3/Q4 and the aftermath From Vantage Point of Market Participant

3. 3 Derivatives Market  “Risk is essential but it needs to be supported. It’s all about the plumbing.”  Drive toward central clearinghouse (central risk pool) where derivative contracts can be submitted, matched, cleared and settled  Resistance to changes that yield a standardized product that creates a more efficient market  Management of gross notional exposures and mitigation of operational risks  Valuation concerns  Valuation reconciliation between counterparties, particularly during periods of market stress  Counterparty credit concerns  Utilization of collateral posted in the ordinary course of their capital markets activities Conversely, counterparties have credit risk that they want to mitigate  Movement to exchange based and cleared products eliminates this asymmetrical benefit Relieves potential “run on the bank” concerns seen in 2008 Market Participant Observations

4. 4 OTC Margin Dispute Trends Example 20082009

5. 5 Commitment to Innovative Solutions

6. 6 Impaired Securitization Markets

7. 7 Shutdown of the Securitization Market  In 2001, Citadel launched a Bermuda based reinsurance business offering large scale, collateralized risk transfers of property and catastrophe risks  Positive performance as business grew (ex 2005); however, needed longer term risk management and capital efficiency strategy in order to grow  Asymmetrical return distributions in best and worst cases  Experience in capital markets led to offering of insurance risk-linked securitization with several benefits Active market demand and diversified investor base Fully collateralized protection Multi-year coverage Fixed pricing terms  Placed largest bank debt indemnity deal done to date in July 2007 at $500 M Market Participant Case Study

8. 8 Alignment of Interest  Citadel and investors’ interests remain aligned throughout the term of the transaction  Citadel must cede all policies within the subject business lines – no potential for adverse selection  At inception Citadel funds retained 100% of the first approximately $650mm of losses each year  Cedants covenant to retain at least 50% of ground up losses below the securitized layer  Losses above the securitized layers are retained by Cedants Term Loan C Term Loan A Cedant Retention Term Loan D Term Loan B Net Losses $1,200mm/P(E)=0.2 bps Limits Written Cedant Retention Pro Forma Cedants Exposure $1,015mm/P(A)=0.7 bps $875mm/P(A)=15.6 bps $710mm/P(A)=90.4 bps $650mm/P(A)=140.0 bps

9. 9 Risk Exposure Note: MPCI and property per risk are not included in the above analysis. Analysis of the pro forma portfolio for calendar year 2007 illustrates per occurrence PMLs All Peril Occurrence PMLs $650 $710 $875 $1,050 $1,200 Term Loan D Attachment Term Loan C Attachment Term Loan B Attachment Term Loan A Attachment Term Loan A Exhaustion

10. 10 Low Probability of Loss Impact Remodeled Key Historical Events 1 $650 $710 $875 $1,050 $1,200 Term Loan D Attachment Term Loan C Attachment Term Loan B Attachment Term Loan A Attachment Term Loan A Exhaustion 1.2004 and 2005 hurricanes are modeled using RMS recommended event IDs. Events prior to 2004 are based on stochastically generated storms that are representative of the historical events. Loss figures gross of reinstatement premiums. 2.Katrina does not include marine gulf or flood.

11. 11 Projected Earnings Distribution (Combined Gross/Net) Projected Earnings Distribution as of 1/1/08 (800) (600) (400) (200) 200 400 50%55%60%65%70%75%80%85%90%95%100% Earnings ($m) Total Gross of Emerson Total Net of Emerson PercentileGrossNet 0.000%292 271 50.000%220 199 75.000%144 123 90.000%(4) (25) 95.000%(143) (164) 98.000%(297) (287) 99.000%(399) (320) 99.600%(502) (355) 99.800%(558) (370) 99.900%(610) (382) 99.998%(851) (459) Expected169 150 Key Percentile - Cumulative Probability

12. 12 Final Analysis  Cost of capital  Capital structure 75% equity and 25% debt Debt layer was 3 year term structure at L+100 up for renewal in May 2009  Consideration of increased capital commitment relative to returns generated from other businesses  Securitization Market  Effectively closed to innovative risk management transaction like Emerson Re  Asymmetrical upside/downside relationship would return to the business  Decision to exit the business Q4 2008 Considerations

13. 13 Funding Markets View from the Eye of the Storm

14. 14 Citadel Investment Group Asset ManagementCapital Markets Alternative Asset Management Market Making / High Frequency Trading Citadel Solutions Largest options specialist Largest retail equity market maker Citadel accounts for approx 30% of US options trading volume and over 8% of US equity volume Multi-strategy hedge funds Planned single-strategy hedge funds Fund administration business offering premium, tailored services to hedge funds Business Architecture

15. 15 Citadel Derivatives Group LLC 8% of US Equity Volume29% of US Options Volume Sept 2008 data A Market Leader in Equities and Options Embracing “disruptive” technologies to improve liquidity and transparency in the capital markets

16. 16 End of an Era Disappearance of the “Shadow Banking System”

17. 17 Liquidity Reserve Maintenance of a pre-funded liquidity reserve to meet contingent cash needs of Citadel’s balance sheet Counterpart Diversity Across both financing and trading counterparts Broad distribution of exposures to maintain operational flexibility in a disruptive market environment Diverse financing arrangements across highly rated counterparts in robust, efficient structures Active capital and balance sheet planning Targeting the relationship between aggregate risk limits and capital required to support them Balance sheet liquidation model: a business unit / strategy analysis of Citadel’s ability to reduce risk positions Liquidity Management Model Citadel’s liquidity ladders to incorporate the following parameters Mark-to-Market exposure from stress events Expiration of committed funding facilities Accelerated Capital Calls Reductions in the Balance Sheet of the Firm Treasury – Liquidity Management Philosophy Ensure the provision of adequate liquidity to meet balance sheet funding needs through all market environments.

18. 18 Crowded Financing Trade Sources of securities Sources of cash Mutual Funds Securities Lenders Beneficial Owners/ Bank Portfolios Dealer Desks Direct Customer Supply Internal Dealer Cash Securities Lenders Cash Reinvest US Commercial Banks Non-US Commercial Banks Prime Brokers Hedge Fund

19. 19 Treasury – Centralized Execution  Central Funding Approach  Assets are funded centrally through Treasury.  Close collaboration to determine the long term funding needs of the business.  Centralized funding through a diverse network of sources of cash and collateral.  Not reliant on PB model  Direct relationships with sources of cash and collateral  Longer term stable commitments  Started effort over 6 years ago Sources of securities Sources of cash Mutual Funds Securities Lenders Beneficial Owners/ Bank Portfolios Dealer Desks Direct Customer Supply Internal Dealer Cash Securities Lenders Cash Reinvest US Commercial Banks Non-US Commercial Banks CITADEL Prime Brokers Centralized execution of secured funding provides substantial scalability and efficiency. It also allows PMs to focus on portfolio construction and Treasury specialists to focus on funding.

20. 20 Funding Dislocation  Accelerated deleveraging on the back of the financial panic and forced liquidations by banks, hedge funds and other investors in Q3 and Q4  Severe dislocation in funding markets post Lehman bankruptcy driven by several factors  Inadequate funding models among firms taking term asset risk without term liability structure  Concerns around systemic risk in the banking system  Lenders became unwilling or restrictive in lending Multiple asset classes impacted, even in fully hedged assets Concerns around changing regulatory frameworks  Implementation of short sale restrictions by regulators in several markets) Ability to liquidate or hedge collateral in a default as primary concern  Breakdown in the relationship between cash and derivative assets, notably in convertible and corporate bonds

21. 21 Funding Dislocation  Citadel focus in Q3 and Q4  Holder of balance sheet assets in a period of unprecedented funding dislocation  Key Focus to maintain strong liquidity and capital position through utilization of management framework Reduction in size of balance sheet/risk broadly but maintain highest quality trades Refocus activities on skill based investment businesses Elimination of several balance sheet intensive businesses  Reinsurance  Fundamental Credit  U.S. Power Trading

22. 22 Estimated US Non-Financial Convertible Discount to Fair Value 5.6 The US Non-Financial Convertible Discount to Fair Value time-series represent the average US non-financial convertible bond discount to fair value, weighted by amount outstanding. For this purpose, the Merrill Lynch US Convertible Index is used to define the set of securities considered for inclusion. Convertible securities whose underlyings do not have exchange-traded options, exchangeable bonds, convertible preferred stock, and mandatorily convertible securities are excluded. The Citadel proprietary valuation model is used to estimate fair value. Citadel’s model is calibrated using US Credit, Equity, and Option market data from January 2003 to present. The Estimated US Non-Financial Convertible Discount to Fair Value time-series incorporates a combination of inputs designed to provide reasonable estimates of fair value. Individuals may disagree about the design of the framework as well as the inputs and assumptions made. The framework, inputs and assumptions may not be accurate, and the inputs will change over time. The actual discount to fair value may differ materially from the estimated fair values generated by the Citadel proprietary valuation model. Furthermore, there can be no assurance that market prices will converge to fair value over time. January 1, 1998 to September 12, 2008

23. 23 Estimated US Non-Financial Convertible Discount to Fair Value by Rating Please see the end notes for important information about this presentation. 10.5 8.9 5.0 200420052006200720082009 January 1, 2004 to April 6, 2009

24. 24 Bond Basis Spreads Historical Data 200720082009

25. 25 Funding Dislocation – The Road “Forward”  Recent Fed data indicates that total bank deposits were approximately $8.8 trillion versus $3.8 trillion in the money funds with growth rates of 5% and 23%, respectively, during 2008  Over half of money fund growth during Q4 2008  Effect of “breaking the buck”  Growth directed toward S/T Agency and Treasury securities as CP holdings and Repo holdings shrunk Repo market down over 30% in Q4 2008; almost 50% in the 2008 Bank CP market shutdown even with government guarantee programs in place Highlights that money funds currently have little use in providing liquidity to the system  Increased importance of bank deposits in traditional mix of short term, medium term and long term secured and unsecured lending by banks for the foreseeable future  Will be constrained by leverage ratio/gross balance sheet concerns Dysfunctional Funding Market Continues

26. 26 End Notes 1.The US Non-Financial Convertible Discount to Fair Value time-series represent the average US non-financial convertible bond discount to fair value, weighted by amount outstanding. For this purpose, the Merrill Lynch US Convertible Index is used to define the set of securities considered for inclusion. Convertibles securities whose underlyings do not have exchange traded options, exchangeable bonds, convertible preferred stock, and mandatorily convertible securities are excluded. The Citadel proprietary valuation model is used to estimate fair value. Citadel’s model is calibrated using US Credit, Equity, and Option market data from January, 2003 to present.