This presentation discusses the changing financial landscape after the 2008 crisis and lessons learned. It covers four main topics: 1) how the financial crisis occurred and the role of poor policy and incentives, 2) changes in regulation and the financial system, 3) key lessons on risk management and governance, and 4) focus areas including liquidity, capital, and compensation. The presentation emphasizes that while regulation is important, the underlying issues were related more to incentives and risk culture within firms.

1. Risk & Performance Management The Changing Financial Landscape: Lessons Learned, Impact of Financial Reform, and Hot Topics Surrounding Risk and Corporate Governance PRESENTERThomas Day Vice-Chairman, PRMIA Board of Directors and Managing Director of Risk Solutions and Policy, SunGard 16 March 2011

2. Standard Disclaimer The views, expressions and ideas of this presentation are those of the author(s) and do not necessarily reflect the views and opinions of SunGard Thank you to SunGardand all the participants on the call.. We are going to strive to be thought-provoking and conversational as we proceed through the presentation. We invite you to submit questions as we proceed through the presentation. We will leave time for Q&A at the end.

3. Agenda 1. Current State. How did we get here? 2. How has the financial and regulatory landscape shifted? 3. What are the key lessons learned and how do we create value in the new financial landscape? 4. Areas of focus for risk management and corporate governance.

4. Agenda 1. Current State. How did we get here? 2. How has the financial and regulatory landscape shifted? 3. What are the key lessons learned and how do we create value in the new financial landscape? 4. Areas of focus for risk management and corporate governance.

5. So What Happened?ANS:A Systemic Failure Due to our “Home Ownership is a Right” National Policy Goals + Poor Monetary Policy “To those of you who have not yet reached President's Club, I want each and every one you to believe you have the potential to achieve this great reward. Now is the time to really kick it into high gear and drive for attending this awesome event! Rankings are updated and posted monthly... I'm especially pleased with your ability to change with the market and responsibly sell more higher-margin product - Option ARM, Home Equity, Non-prime, and Alt-A.” - November 2006, WaMu Internal E-mail Can’t compete head-to-head with GSEs. A funding curve we can’t match. Improperly priced credit derivatives & taxpayer funded dividends. Cheap credit: A “glut” of liquidity Incentive Plans: Focus on today’s GAAP earnings, not value-creation Poor risk-controls: growth, concentrations, funding Lack of transparency New and untested product(s) Risk Adjusted Returns (in Basis Points) ???

8. The market should discipline rent-seekers. Equity is meant to be “owned” not merely traded, and certainly not manipulated.

9. Like getting married. Should feel the full weight of “I Do.”Bonuses paid to the top 5 financial firms in the U.S. Can anyone guess if these are “risk-adjusted” bonuses?

11. Poor incentive structures within firms and a “sell-side”, “HFT”, “make a quick buck” (i.e., “Noise”) mentality to equity ownership. This institutional arrangement fosters rationally unsavory capital allocation decisions in the pursuit of EPS.

12. It raises profound questions about the corporate structure itself, and especially corporate governance.To dissuade some that view this as a new or radical idea: “But as longer-term commitments have come to dominate tax and spending decisions, such cash accounting has been rendered progressively less meaningful as the principal indicator of the state of our fiscal affairs. An accrual-based accounting system geared to the longer horizon could be constructed with a reasonable amount of additional effort.” “An accrual system would allow us to keep better track of the government's overall accrued obligations and deferred assets. Future benefit obligations and taxes would be recognized as they are incurred rather than when they are paid out by the government.” - Alan Greenspan, February 11, 2003 - http://www.federalreserve.gov/boarddocs/hh/2003/february/testimony.htm

14. Some regulators, in their “relationship” management capacity, fancy themselves as consultant/advisors, not beat-cops. Very few risk-focused exams that labor on the USC and CFR. TBTF or TCTM?

15. However: Weak regulation didn’t “cause” the problem. Moreover, adding more of what didn’t work won’t fix the structural issues that continue to exist. Thus, Answer #1 – regulators and ineffectual regulation - is wrong. Contributors? Sure. Foremost to blame? Not a chance.“Kerry Killinger, the CEO of Washington Mutual (WaMu) will be in town Friday and wants to have a lunch meeting. He’s my largest constituent asset wise.” – May 2007, OTS internal e-mail

17. IMF’s Lessons for us? Worth reviewing: Good supervision is intrusive Good supervision is skeptical but proactive Good supervision is comprehensive Good supervision is adaptive Good supervision is conclusive To achieve these elements you need adequate resources, clear strategy, robust internal organization, effective working relationship with other agencies (e.g., umbrella supervision) and the willingness to act. According to Oliver Hart of Harvard and Luigi Zingales of the University of Chicago, SIFIs could borrow at 29bps beneath small banks prior to the crisis; today the SIFIs can borrow at 78bps below. According to their analysis, this amounts to a $34.1 billion subsidy courtesy of our unusual and exigent circumstances. As an economist colleague said to me recently: “Not only are we all Keynesians. It seems we are all Frenchmen too.” “In addition to the broad issues of capital and liquidity, I also argue that the doctrine of ‘too big to fail’ (or, more appropriately, ‘too interconnected to be liquidated quickly’) cannot be allowed to stand.” “I agree with Gary Stern, the former President of the Federal Reserve Bank of Minneapolis, who has long held the position that ‘. . . creditors will continue to under-price the risk-taking of these financial institutions, overfund them, and fail to provide effective market discipline. Facing prices that are too low, systemically important firms will take on too much risk.” - Alan Greenspan, FCIC, April 7, 2010 Said differently: Is it necessary for the market to see Title II of the DFA in action?

18. Agenda Current State. How did we get here? How has the financial and regulatory landscape shifted? What are the key lessons learned and how do we create value in the new financial landscape? Areas of focus for risk management and corporate governance.

19. Do you recognize this quote? This is “…the most important federal legislation relating to the financial community since the 1930s.” “On March 31, 1980, President Carter signed into law the Depository Institutions Deregulation and Monetary Control Act of 1980, the most important federal legislation relating to the financial community since the 1930s. The act has nine titles covering a wide range of subjects, including reserve requirements, access to and pricing of Federal Reserve services, a phase-out of Regulation Q and new powers for thrift institutions.” – Frank Morris, Former President, FRB Boston “Last year the Financial Modernization Act of 1999 (FMA) was signed into law. Also known as the Gramm-Leach-Bliley Act, this statute represents the single most important set of regulatory reforms since the Glass-Steagall Act of 1933.” - James Thompson, FRB Cleveland, 15-April-2000 …and here we are, once again, with the most important federal legislation since the 1930s: The Dodd-Frank Act (DFA), B3, and the G-20 reform agenda. Collectively, it seems we have a rather short memory. History is important. More of us should study it.

21. We take this Commercial Break to Set the Record Straight: It’s About Incentives We continue to possess a patchwork of regulatory agencies, even if we have vested one agency with more power than any other – the Fed. While the number of supporting characters is vast, the fault rests squarely with our legislators – which means it rests with the American people. What happens when the sovereign becomes the greatest sources of systemic risk? Without the direct influence of congressional action(s), the breadth, depth, duration, and scope of the financial crisis could never have happened. This crisis is a direct consequence of legislative ineptitude and an almost complete absence of timely and responsible action by our legislature.

23. Contingent capital

24. FDIC assessments

25. Basel-3

26. quality & quantity of capital

27. liquidity standards

28. FSOC

29. Resolution Authority

30. Office of Fin’l Research

31. Volker Rule

32. Routine stress-testing

33. Non-bank Fis

34. Growth restrictions

35. Redefine capital

36. CCPs

37. CFTC (from 14 to 20)

38. FMUs

39. Improved disclosures

40. OFR

41. CFPB

42. FIO (“US Solvency 2”)[NOTE: Insert Miracle Here] Transparent Resilient Robust International Harmonization and Coordination (…) (…) FSB G-20 BCBS ESRB CEBS IOSCO

43. Regulatory Reform: Timeline to the Current State

44. Regulatory Considerations Despite our best attempts, human behavior is difficult to regulate completely Although we must strive to improve our abilities to see around corners, we must not fool ourselves into believing we know how to identify bubbles and prevent systemic risk events A number of policies and practices at financial institutions were inherently pro-cyclical, further magnifying effects during the boom and bust Incentives are important to regulating behavior, however, establishing strong risk discipline at financial institutions is genetic; and something not mandated through regulatory edict

46. The recent crisis exposed significant management, process, regulatory and governance deficiencies across the industry

47. Has this new regulatory regime focused on the right things to be effective at preventing a future crisis?

48. Dodd-Frank and Basel III address a number of critical pressure points in financial markets and governance

50. Agenda Current State. How did we get here? How has the financial and regulatory landscape shifted? What are the key lessons learned and how do we create value in the new financial landscape? Areas of focus for risk management and corporate governance.

52. Conclusions:

53. Avoidable

54. Regulation and supervision (blame the cops for the crime?) (#4?)

55. “Dramatic” failures in corporate governance and risk management (#2?)

56. Leverage, opacity, and lack of disclosure (#3?)

57. Poor government preparedness

58. Breakdown in accountability and ethics (#1?)

59. Failure in OTC and rating agency oversightIn the FRS Holding Company Manual corporate governance – while referred to repeatedly in §1050 – is never defined; however, if one takes from the text the intended theme, it seems that corporate governance is predominately concerned with treasury, audit, Sarbanes-Oxley §404, and corporate finance. This is inconsistent with a multiplicity of definitions available in the marketplace that suggest a much richer definition and scope; a scope that includes notions of strong and active board culture, business savvy, ethics and fair business conduct, accountability, integrity, a concern over capital stewardship and value, incentive compensation, and other principle-based statements. Note that the FRB’s Handbook didn’t include any procedures relating to incentive compensation, other than for retail non-deposit investment products, until July 2010.

61. Data and analytical limitations leading to underestimation of risks

62. Cognitive biases among senior management leading to:

63. Lower aversion to risk due to perceptions of continued low losses based on prior experience

64. Poor risk management culture and stature and uncertainty bias

65. Herd behavior in development and expansion of riskier products

67. Loan Loss Reserves

68. Bank Capital Requirements

69. Liquidity

70. Deposit Insurance Premiums

72. Banks slow to buildup credit reserves during good economic times, must accelerate buildup as markets deteriorate

74. But are proposals such as countercyclical capital buffers an effective mechanism to address this problem?Countercyclical Capital Buffer (%) KMax H L zt

76. Responses and outcomes are detrimental to financial system

77. Asset dumping at firesale prices

78. Credit tightening

79. Are Basel liquidity ratio requirements the right answer?

80. Net Stable Funding

82. Deposit insurance premiums tied to Bank Insurance Fund (BIF) reserve levels

83. BIF Reserve/Bank Deposits >1.15%, only riskiest banks required to pay premiums

84. When ratio <1.21%, all firms must pay in accordance with FDIC premium schedule

87. Remedies not always an improvement

88. Countercyclical capital

89. Other remedies await important players

90. FASB for fair value accounting and loan loss reserve policy

91. Regulations also miss key contributing factor of the crisis

92. Poor risk governance

95. Funding and deposit strategies (preparations made?)

96. Capital planning, including focus on non-organic growth (M&A should pick up)

97. Balance between liquidity and need for spreadProfitability, margin-protection, and efficiency Financial risk and corporate governance Regulatory preparedness

101. Full employment at:

102. Deloitte, KPMG, PwC, BAH, Promontory

103. Have regulatory experience, will hire

104. Major areas of need:

105. Infrastructure issues

106. ERM is “for keeps”

108. Thank You! Risk & Performance Management The Changing Financial Landscape: Lessons Learned, Impact of Financial Reform, and Hot Topics Surrounding Risk and Corporate Governance PRESENTERSThomas Day Vice-Chairman, PRMIA Board of Directors and Managing Director of Risk Solutions and Policy, SunGard 16 March 2011