What Next Life After Lehman by Takumi Shibata

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What Next?Life After Lehman

Takumi Shibata

Deputy President & COO

Nomura Holdings Inc.

April 16, 2009



1

Global Flow of Funds and Free Enterprise

Free Enterprise Spirit

Nationalization

Protectionism Globalization

End of Cold War

2005-06?

Where are weheading?

Government interventions currently seen put an end to free enterprisespirit and restrain global flow of funds



2

Financial Market Events What started out as an regional mortgage problem ended out to be a

world-wide financial crisis

0

20

40

60

80

100

120

Jul-07 O ct-07 Jan-08 Apr-08 Jul-08 O ct-08 Jan-09

S&P 500 S&P Financials

Bear Sternsliquidates twofunds(31st Jul 07)

BNP Paribassuspendsthree funds(9th Aug 07)

Citigroupbuys back SIVassets(13th Nov 07)

Citigroup, UBS, MorganStanley, Merrill Lynch receivescapital injection from SWF(Nov 07 to Jan 08)

JP Morganacquires BearSterns(16th Mar 08)

BoAacquiresMerrill Lynch(15th Sep 08)

Goldmanand MorganStanley tobecome Bank-holdingcompany(21st Sep 08)

TARP introduced(19th Sep 08)

PPIF introduced(23rd Mar 09)

FSP introduced(10th Feb 09)

Citigroupannouncereorganization

(16th Jan 09)

2 GSE come underconservatorship(7th Sep 08)

Lehman filesChapter 11(15th Sep 08)



3

Lehman Specific Events

Lehman CDS payout settles at 8.6 cents on a dollar.21st Oct

Bain Capital and Hellman & Friedman agrees in acquisition of asset management business

(Neuberger Berman)29th Sep

Nomura Holdings announces agreement on acquisition of Lehman's European equities and

Investment Banking businesses.23rd Sep

Nomura Holdings announces agreement on acquisition of Lehman's Asia Pacific franchise.22nd Sep

Barclays Plc announces acquisition of Lehman's North American business.17th Sep

Lehman files Chapter 11.15th Sep

Announces USD 6.9 bl. for 3Q results, further plunge in stock prices amid reform strategies.10th Sep

Report says KDB's negotiation failed, strong plunge in stock prices.9th Sep

Report says S. Korea's KDB having interest in acquiring Lehman.22nd Aug

Posts USD 2.8 bl. in losses for 2Q results.16th Jun

Announced to raise USD 6 bl. in common and preferred stock.9th Jun

Announced reduction of retail mortgage and suspend wholesale mortgage lending business in U.S.17th Jan2008

Announced closure of BNC Mortgage, Subprime-loan originator.22th Aug

Announced investments to 20% of D. E. Shaw group.13th Mar2007



4

Unexpected repercussions from Lehman

After the Reserve MMF broke the buck, general fear emerged on thewhole MMF market in the US, which lead to the Fed and the Treasury

to adopt unprecedented measures

O ther984

62%

M M F616 bl.

38%U SD 3.8tr.

U SD 6.4tr.

Tim e D eposits M M F

Outstanding assets Significance in Commercial Paper Market

(Source) FRB Flow of Funds Accounts



5

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09

CDS Index

Unexpected repercussions from Lehman

Failure of Bear Sterns and Lehman Brothers lead to severe mistrustamong financial institutions, and temporal CDS crisis

JP Morganacquires BearSterns(16th Mar 08)

Lehman filesChapter 11(15th Sep 08)

(Source) Nomura Institute of Capital Markets Research, based on Bloomberg



6

Unexpected repercussions from Lehman Allowing Lehman to go bankrupt lead to contagion in prime brokerage

counterparties

Lehman transferred USD 8 billion worth of cash andsecurities from London to New York in 12th Sep, justbefore the filing of Chapter 11

Lehman transferred USD 8 billion worth of cash andsecurities from London to New York in 12th Sep, justbefore the filing of Chapter 11

GLG, Bay Harbour and other hedge funds’ assets heldin Lehman’s prime brokerage account were frozen,which lead to wide spread distrust between investors

and prime brokers

GLG, Bay Harbour and other hedge funds’ assets heldin Lehman’s prime brokerage account were frozen,which lead to wide spread distrust between investorsand prime brokers

Also, collateral in derivatives transaction estimated atUSD 1 trillion were not returned, and went understrong dispute

Also, collateral in derivatives transaction estimated atUSD 1 trillion were not returned, and went understrong dispute



7

Regulatory response Regulatory focus now on emergency recovery measures

Going forward, government initiatives will be focused more on systemic

risk containment

Settlement of today’s crisis

1) Capital Injection

2) TARP, TALF, PPIP

3) Relaxing monetary policy

4) Liquidity provision to markets

Prevention of future crisis

1) Co-operation of authorities

2) Creation of systemic regulator

3) Re-engineering of IMF

4) Regulating hedge funds

5) Glass-Steagall 2.0?



8

Prudential business management Financial institutions must align with regulators’ policy and manage their

capital adequacy as well as their illiquid assets

Problem of procyclicalityProblem of procyclicality Presuppose liquidity of assetPresuppose liquidity of asset

Take conservative assumptions for liquidity bufferTake conservative assumptions for liquidity buffer

Complement by stress testing illiquid assetComplement by stress testing illiquid asset

Limitations of capital adequacy testLimitations of capital adequacy test



9

Litigation and political risks

（出所）Investment Dealers’ Digest （September 29, 2008)

Andrew Cuomo (NY Attorney General)：

Requested executives of Citi and AIG to return their bonusesUS House of Representatives：

90% taxation to bonuses of AIG executives

Wall Street=Pennsylvania Avenue?

Risk of unexpected intervention by government higher than ever



10

Opportunities in Asia –Economic growth

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

World Major advanced economies (G7) Developing Asia

(%)

estimate

GDP Growth Comparison

Source: Nomura Institute of Capital Markets Research, based on IMF

While the developed economies stagger, developing Asian countriesemerge as a new source of growth



11

Opportunities in Asia –Securitization

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2002 2003 2004 2005 2006

Japan Korea India C hina

（Billion Dollars）

Growth of Major Securitization Markets in Asia

Source: Nomura Institute of Capital Markets Research, based on various sources

Same level asthe US in 1995

Risks in the Asian financial sector is concentrated in the banking sector,and multi channelling of capital is essential

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US Thailand India China Korea Japan

Bank loans Other debt Bonds Shares/equity stakes

Corporate Fundraising



12

Opportunities in Asia –Islamic finance Malaysia as an Islamic finance hub in Asia

Standardized and sophisticated environment developed

Others follow suit – Singapore, Indonesia, Hong Kong, Korea, Japan

Nomura opens new franchise dedicated to Islamic fund management

Sukuk Issuance

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008

Malaysia UAE Bahrain Kuwait Saudi Arabia Others

（No. of issuance）

Source: Nomura Institute of Capital Markets Research, IFIS



13

Going forward - Independence Genuine “independent” investment banks will have advantage

Commercial Banks

Investment Banks

Government

Conflict of interest

Compensation

Decision making

Home country bias

Superiority of“independent”

investment banks



14

Going forward - Independence Most prominent standalone investment banks have been acquired by

commercial banks

CitigroupCitigroup

WachoviaWachovia

Wells FargoWells Fargo

Washington MutualWashington Mutual

Goldman SachsGoldman Sachs

Morgan StanleyMorgan Stanley

Merrill Lynch

Merrill Lynch

Lehman BrothersLehman Brothers

Bear SternsBear Sterns

Chapter 11

Acquisition

Bank

Holding Co.

InvestBank

Holding Co.

Citi HoldingsCiti Holdings

CiticorpCiticorp

Morgan StanleySmith Barney

Morgan StanleySmith Barney

Non-core business

Core business

Wealth management joint venture

JP Morgan ChaseJP Morgan Chase

Bank of AmericaBank of America

A c q

ui si t i on

A c qui si t i on

A c qui si t i on

Partial acquisition

Partial acquisition

NomuraNomura

MUFGMUFG

BarclaysGroup

BarclaysGroup

Note: As of Mar. 31, 2009. Green represents US banking groups and blue represents US investment banks.

Source: Nomura Institute of Capital Markets Research



15

Going forward - Independence Institutions opted for government support, hence losing autonomy

Fund raising by major financial institutions0 20 40 60 80 100 120

Citi Group

Bank of

J.P. Morgan

Wells Fargo

RBS

UBS

Barclays

Morgan

HSBC

Goldman

Credit Agricole

Deutsche

BNP Paribas

Nomura

Public Funds

Private Funds

（Billion US$）

Note: Includes common stock, preferred stock and hybrid securities recognized as regulatory capital. Estimated by Bloomberg based on company disclosures.From the fourth quarter of 2006 to Mar. 31, 2009. Bank of America includes Merrill Lynch, JPMorgan includes Bear Sterns and Washington Mutual, Wells Fargo

includes Wachovia.Source: Nomura Institute of Capital Markets Research, based on Bloomberg



16

Going forward – Back to basics Business model of investment banks should and will shift to more client

focused one

Value up for clients

High leverage & Arbitrage



17

Going forward – Back to basics Several institutions had a leverage ratio of unjustifiable level, and are

now deleveragingWritedowns/losses and leverage ratio at major financial institutions

0 20 40 60 8005001,0001,500

（Billion US$）（×）

Wells Fargo

Bank of America

JP Morgan

Citi

UBS

HSBC Holdings

Morgan Stanley

RBS

Deutsche Bank

Credit Agricole

Barclays CapitalBNP Paribas

Goldman Sachs

NOMURA

Note: Writedowns and losses since fourth quarter 2006 announced as of March 31, 2009, calculated by Bloomberg. Writedowns include those on equities notdirectly reflected in calculation of revenues. Losses include year-on-year increase in provision for bad loans. Leverage ratio calculated by Nomura Institute of

Capital Markets Research based on most recent company disclosure. Calculated by dividing total assets by shareholder equity. Bank of America includes MerrillLynch, JPMorgan includes Bear Sterns and Washington Mutual, Wells Fargo includes Wachovia.

Source: Nomura Institute of Capital Markets Research, based on Bloomberg and company financial disclosure documents

Writedowns and losses Leverage ratio



18

Nomura in Asia –Lehman integration Nomura acquired people, hence new client relations

M&A financial advisors league table

–Any Asia (incl. Japan) involvement announced



19

Nomura in Asia –Cross border M&A

Kirin – San MiguelJapan - Philippines

Asahi – TsingtaoJapan – China / Belgium

Chinalco – Rio TintoChina – U.K. / Australia

Nomura contributed to several value-enhancing M&A deals after Lehman

Daiichi Sankyo– Ranbaxy

Japan - India

Asahi – Cadbury

Japan - Australia

Sinopec – Tanganyika

China - Canada



20

Nomura in Asia -Conclusion Nomura has all the advantage to become a leading player in Asia

What Next Life After Lehman by Takumi Shibata

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