Citi CMBAdvanced Risk Issues

Summary and Observations

Tarrytown, NYOctober, 2007

2 September 2007

Risk Management Risk Management and and

Revenue GrowthRevenue Growth in ain a

Complex Global BankComplex Global Bank

Citi CMBAdvanced Risk Issues

3 September 2007

● 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 does Citi manage risk today?How does Citi manage 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, and curious learners, skeptical by nature, and curious learners, alwaysalways

Why Why WereWere We Here? We Here?

Citi CMBAdvanced Risk Issues

4 September 2007

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.

5 September 2007

6 September 2007

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.

7 September 2007

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

8 September 2007

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….

9 September 2007

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

sophisticated ways of spreading it

The alchemists of finance – May, 2007

10 September 2007

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

11 September 2007

A New World Disorder for Debt Traders System of Risk DispersalProves to Be a Bit Erratic WSJ August 10, 2007; Page C1

Welcome to the new world of finance.

Markets have taken on an increasingly important role since the financial crises of the 1980s and '90s.

But the downsides to this system could be serious. A financial architecture that dispersed risk also helped to create it.

And when troubles emerge -- as they have in the U.S. housing market -- they can show up just about any place in the world and in ways nobody predicted.

12 September 2007

Banks in troubleThe game is up

Aug 16th 2007

13 September 2007

Good Risk Management is a Driver of Revenue Growth

14 September 2007

Advanced Risk IssuesMonday Oct 1 – Participants’ Risk Concerns

• Reputation Risk – who are our clients? Choose them carefully

•Liquidity for clients

•Price of risk – backstops are not priced to be drawn

•Global and local macro-economic environment

•Emerging market risk

•Asset valuations

•Regulatory risk – client and environmental

•Pipeline risk and distribution risk

•Modeling structured derivatives

•Operations – booking systems

•Counter-party risk

•Citi capital constraints

•Competition

•Client relationships

•Loan reserve policies and practices

•Downward spiral of corporate cash flows

•Reputation risk relative to stalled underwritings

15 September 2007

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• Financial Fraud Detection – (True Save

case)

16 September 2007

Advanced Risk Issues Course Overview

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

Strategy (Corning Case)

• Business Controls and Strategy (Citibank Dublin Case)

17 September 2007

Advanced Risk Issues

Course Overview

Deal Structure and Risk

- Poland A2 Motorway Case

Converging Risk Issues – Credit Risk, Market Risk, Country Risk, Derivatives Risk

How Does Citi manage risk? • Underwriting risk and conflict management • Market risk / Convergence Risk• Global portfolio management• Operational risk• Country risk• IRM

18 September 2007

ARI Presentations – “Seeing Around Corners”

CMB Risk Management – Pat Ryan

Global Portfolio Management – Bill Hartmann

Conflict Management / Franchise Risk – Rashmini Yogaratnam

Market Risk / Convergence Risk – Murray Barnes

Operational Risk – Jaidev Iyer

Problem Recognition / Early Warning Signs - Tony Murphy

Financial Fraud – Joe Forte

Country Risk - Doug Smee

Derivatives Risk – Patrick Pancoast

19 September 2007

Advanced Risk IssuesQuotes of the Week

•You get the systems you deserve– Jaidev Iyer

• We want to be the BEST company– Pay Ryan

• It’s tough to be diligent when you’re looking at huge revenue streams– Joe Forte

• Don’t mix high operating/business risk with high financial risk– Arnie Ziegel

• Do not try to rationalize away increasing danger signals, instead try to find out why– Doug Smee

• We always rationalized why it was OK to exceed obligor limits– Bill Hartmann

• Risk Partners and business partners have to be cognizant of the minimum amount of capital necessary to stay with the client– Pay Ryan

20 September 2007

Advanced Risk IssuesQuotes of the Week

•The purpose of strong risk management is to grow the business

– Patrick Pancoast• We wish we had even more dry powder right now

– Pat Ryan• We’re using the balance sheet and capital for lower profit

business– Bill Hartmann

• The origination / distribution model has become a risk management model– Murray Barnes

• The new par is “96”– Patrick Pancoast, Carl Cho

• When market liquidity evaporates, you need a different skill set– Murray Barnes

• Business managers can sometimes be the best risk managers– Patrick Pancoast

21 September 2007

Advanced Risk IssuesQuotes of the Week

• As liquidity evaporates, market risk ends up looking like credit risk

– Murray Barnes

• Good business is identified as bad business, and bad business is identified as good business

– Patrick Pancoast

• If you can’t mark to market, you mark to model. If you can’t mark to model, you mark to guess

– Patrick Pancoast

• Anything that is unsustainable ends. The longer it takes to end, the bigger the crash will be when it happens

– Doug Smee

• Leverage can hurt you a lot, but lack of liquidity can kill you

– Pat Ryan

22 September 2007

Advanced Risk IssuesQuotes of the Week

• The banks get cash, the bonds get equity

– Bill Hartmann

• History tells us that we’re creating tomorrow’s problems today

– Bill Hartmann

• Good people behaving badly, bad people behaving badly

– Jaidev Iyer

• It’s your fault, you gave me the money

– Arnie Ziegel

• It was BBB, now it’s trading at 30. It’s your fault. You sold it to me

– Pat Ryan

• 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

23 September 2007

Advanced Risk IssuesQuotes of the Week

• As soon as you hear the word “Miracle”, sell. There are no miracles.

– Doug Smee

• We looked at our ability to distribute as our exit strategy

– Murray Barnes

• Don’t be lulled into a false sense of security when there’s a Brand name on the counter-party

– Pat Ryan

• The future reputation of your firms could well depend on how you respond to the conflicts I’ve mentioned as well as those I have not

– Rashmini Yogaratnam

• We end up doing too little too early, too much too late

– Doug Smee

24 September 2007

Advanced Risk IssuesQuotes of the Week

• The known unknowns, the unknown unknowns

– Murray Barnes

• You have to protect yourself against the unknown

– Bill Hartmann

• Citi, we expect you to serve as an example. We hold you to a higher standard

– Rashmini Yogaratnam

• What can happen on one bad day out of 100, what can happen on the worst day?

– Murray Barnes

• We’re not sending your clients to the graveyard, we’re sending them to the recovery room

– Tony Murphy

• It goes from amusement, to bemusement, to something else

– Jaidev Iyer

25 September 2007

Advanced Risk Issues Quotes of the Week

• Choose your clients carefully

– Arnie Ziegel

• In the long run, treating customers fairly has proven to be good business

– Rashmini Yogaratnam

• We have to get a fully diversified book of business, which is the hallmark of everything we do

– Pat Ryan

• We need you to be curious learners throughout your entire career

– Pat Ryan

• How Citi manages the impact of the next downturn will define us as an institution

– Michael Corbat (ARI, June 2007)

26 September 2007

● 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 does Citi manage risk today?How does Citi manage 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, and curious learners, skeptical by nature, and curious learners, always. always.

Why Why WereWere We Here? We Here?

Citi CMBAdvanced Risk Issues

27 September 2007

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

●An effective organization requires Business and Risk to work as one

●Don’t assume that what we distribute, or plan to distribute, can’t come back

●Citi must maintain a superb control culture and business culture

28 September 2007

Excellent risk management for revenue growth requires:

•“Seeing around corners”….. finding risk where we didn’t know or think it existed understanding the convergence of types of risks, and identifying the opportunities associated with risk

•Skepticism to properly balance risk with revenue

•Identifying potential flaws of business strategies – internal and clients

•Understanding the increasing complexity of products

29 September 2007

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 analysis is 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

31 September 2007

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