St Petersburg Graduate School of Management June 6, 2008 Michael Klein Chairman of the Institutional Clients Group Vice Chairman, Citi

The Headlines Tell The Story… “The Collapse of Major Investment House: Symbol of Wall St. Era Is Dismantling” “Facing Unfortunate Facts; It’s Time to Separate the Recession from the Euphemisms” “Middle East Investor Buys Major Stake in U.S. Bank” “Leveraged Buy-Out Funds Are High-Fliers No Longer” “Anti-LBO Bill Introduced in Congress” The Agency was Starting to Detect Problems in Bank Lending to Highly Leveraged Companies” “The Market for Bank Debt is in Complete Disarray” –New York Times, –Washington Post, 1991 –The Associated Press, 1991 –Wall Street Journal, 1990 –Reuters, 1990 –OCC, 1989 –ML,

The Markets Have Been Declared Dead Total GDP Growth Equity Market (DJIA) M&A Activity But some companies, firms and business models did not survive  41%  319%  905%  3,194%  69%  240%  662%  1,383%.. And Reborn Many Times Leveraged Finance Issuance 2

How The Markets Have Changed 2H 07: Markets Seized H1 08…? Drought Credit Contraction RecessionIlliquidity … Through Summer ’07: Liquidity Wave 3

A Decade of Financial Wealth Per Capita Income EquitiesReal Estate Commodities DerivativesArt Source: Factset, EIU, Reuters, Citi Research, Artnet Note: Per Capita Income Global, Equities: S&P 500, Real Estate: FTSE EPRA/NAREIT Global, Commodities: Moody’s Commodity Index Derivatives: Citi Wedge 2007 dollar amount in trillions. 4

Globalization And Liquidity The Three Waves Of Globalization Investment Grade Emerging Market Sovereigns Local / Global Bonds Local / Global Banks EM Equity Markets RegulatoryTechnologyCapital Personal Computers / Networks Internet Mobile Phones Wireless WTO NAFTA EU CAFTA 5

The Liquidity Cycle Liquidity Cycle Global Economic Transition Robust Growth New Capital Flows Excess Liquidity Reach for Yield 6

Unprecedented Liquidity Source: Dealogic & BIS. US$ in BillionsUS$ in Trillions Equity & Debt Issuance Value of Outstanding Derivatives 7

Three Main Drivers of Global Liquidity Global Liquidity Economic Industrial New Engines Commodities-Driven Sovereign Reserves Financial Entrants 8

Source: US Census Bureau. (Units in 000s) U.S. Housing Mortgage market at $11T equals GDP. Liquidity Evaporates Triggered by Housing and Leverage Subprime Lower Grade Securities Pricing Subprime is less than 10%. 9

Contagion Spread Through The Financial Markets Source: Citi, Bloomberg, SDC Asset-Backed Commercial PaperFixed Income Markets Significant Market Volumes Decline Y-o-YEquity Volatility 10

Impacted Many New Markets Sub-Prime Mortgages Leveraged/ Liquidity Loans Commercial Paper Bank Balance Sheets Equities Decline TBD… SIVs Subprime CDOs Monoline Insurers Auction Rate Market Conduits Derivatives 11

Enormous Capital has been Drained out of the System… Source: Bloomberg (May 9, 2008). Virtually all caused by mortgage exposure. Cumulate Losses Since Beginning of 2007 to Date 12

Enormous Capital has been Drained out of the System Banks & Brokers U.S Commercial Paper Market Structured Finance / ARS Market Other (~$1,000 Billion) ? Source: Bloomberg, Federal Reserve, Dealogic, Citi estimates. ~$5.6 trillion 13

Broker-Dealers and Banks’ Financing Costs Exploded 5 Year CDS Spreads January ’06 to December ‘06January ’07 to July ‘07August ’07 to Current 14

Financing Markets are a Balance of Power Central Banks Universal Banks Brokerage Firms Capital Markets Investors In Times of Stress, the Power Moves to the Central Bank Substantial liquidity from Central Banks 3.25% cut to discount rate Unique use of Fed discount window Bear bailout Mortgage commitments approaching $500B 15

CompanyCapital Raise $17.0 Billion $13.1 Billion $10.5 Billion $10.0 Billion $9.7 Billion Investors Have Essentially Replenished the Near Term Gap CompanyCapital Raise $44.1 Billion $43.7 Billion $23.3 Billion $17.4 Billion $17.9 Billion Total Capital Raised of over $275 Billion / Total Funding of $700 Billion Source: Bloomberg (May 9, 2008). 16

$3.0 $ Sovereign Wealth Funds: Competitors or Partners? SWFs Are Projected to Grow Significantly (in Trillions) SWFs are Big and Getting Bigger ($ T) 17

SWF Capital Can Reshape Global Economic Landscape Source: Warnock and Warnock: “International Capital Flows and US Interest Rates,” NBER 12560, Oct McKinsey Global Institute: “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets,” Oct Estimates of SWF capital inflow effects based on historical relationship between GDP growth and FDI, as estimated by Carkovic and Levine (2005), “Does Foreign Direct Investment Accelerate Economic Growth?”. Purchasing Power Reduces Cost of Treasuries by 130 bps If SWFs Primarily Invest in US, Growth Increases by 1/3 At Oil Prices of $100/barrel, Incremental $2.5 bn Investment into World Markets per Day 18

The Four Dichotomies Since the Dislocation Began US vs. InternationalFinancial vs. Real Economy Debt vs. EquityThe Great Emerging Markets Source: Factset, Dealogic, IMFReports All are Converging. 19

Trends that Matter New Capital Flows New Capital Flows & Disintermediation Regulatory Change Energy/ Commodities Emerging Markets 20

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