Advanced Risk Issues

Summary and Observations

Dallas, TexasOctober, 2007

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Risk Management Risk Management and and

Revenue GrowthRevenue Growth in ain a

Complex Global BankComplex Global Bank

Advanced Risk Issues

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● What are the risk issues that are of prime What are the risk issues that are of prime concern to Citi today?concern to Citi today?

● How is Citi managing risk today?How is Citi managing risk today?

● How do risk management and business How do risk management and business management work together to drive management work together to drive shareholder value?shareholder value?

● To help remind you what you already know To help remind you what you already know about risk management and analysis!about risk management and analysis!

● And, to remind you that great bankers are And, to remind you that great bankers are skeptical by nature skeptical by nature

Why Why WereWere We Here? We Here?Advanced Risk Issues

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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

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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.

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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.

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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.

“Credit Matters Today”

March 5, 2007

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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….

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Global investment banks are taking ever more risk, and are devising ever more

sophisticated ways of spreading it

The alchemists of finance – May, 2007

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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

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Banks in troubleThe game is up

Aug 16th 2007

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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."

Headlines

September 20, 2007

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.

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Good Risk Management is a Driver of Revenue Growth

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Advanced Risk IssuesMonday 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

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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

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Advanced Risk Issues Course Overview

Assessing management ability, business strategy, and controls • Management Competence and Business

Strategy (Corning Case)

• Business Controls (Citibank Dublin Case)

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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

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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

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Advanced Risk IssuesQuotes 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

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Advanced Risk IssuesQuotes 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– Murray Barnes

• Don’t mix high business risk with high financial risk

– Arnie Ziegel

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Advanced Risk IssuesQuotes 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

– Arnie Ziegel

• Funding long-term, illiquid assets with short-term money is a high risk strategy, irrespective of the credit quality of the assets

– Murray Barnes

• 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

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Advanced Risk IssuesQuotes 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

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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

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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

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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……………

Advanced Risk Issues 2007Seeing Around Corners

Risk Management and Revenue

Growthin a

Complex Global Bank

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