D E C E M B E R 1 7 , 2 0 0 8

T H E F I N A N C I A L C R I S I S — C H A L L E N G E S A N D I M P L I C A T I O N S

Dr. Karl-Georg Altenburg

CEO J.P. Morgan Germany/Austria

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Events of the last few weeks and months have created unprecedented turmoil across markets …

Lehman file for biggest bankruptcy ever (15 September)

Barclays and Nomura to buy Lehman assetsEuropean governments step in to rescue Fortis

BNP Paribas buys Belgium/Lux. activities

Lloyds to acquire HBOS for US$22bn (18 September)

Bank of America to buy Merrill Lynch for US$50bn (15 September)

AIG bailed out by the Fed with a US$85bn facility(14 September)

Goldman & MS to become Fed-regulated banks

Government takes control of B&B and Santander buys branch network

Goldman raise US$10bn capital via Buffett and stock offering (24 September)

Regulators fight back and take aggressive steps to support markets and pre-empt financial crisis

Assisted bail outs e.g. AIGBroadening of allowed

collateral rulesAdditional liquidity operations

Federal rescue of Fannie Mae and Freddie Mac

Guaranty Program for Money Market Funds

Short-selling restrictionsFurther bank deposit

guarantees

$700bn Emergency Economic Stabilisation Act Capital injections for banks

across the globeGovernment guaranteed FIG

bond issuance

Government guaranteed commercial paper

Citi and FDIC try to bail out Wachovia, Wells Fargo steps-in

MS to sell 20% stake to MUFJ

Plans for further bail-outs, but path to rescue is not smooth

Icelandic government acquires 75% of Glitnir, worries over other Icelandic banks

J.P. Morgan Chase to buy WaMu’s banking operations (25 September)

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0

100

200

300

400

500

600

700

800

Oct-98 Jan-00 May-01 Aug-02 Nov-03 Feb-05 May-06 Aug-07 Nov-08

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%FTSE 100

S&P 500

MSCI EM

10-year performance of selected equity indices and volatility 10-year performance of selected equity indices and volatility

Equity indices rebased to 100 VIX volatility index

… causing an unusual period of sustained volatility …

Source: Bloomberg (as at 25 November 2008)

Russian

/Asian

crises

9/11

US

accounting

scandals

Current crisis

Dot-com

bubble

burst

Spring 2006

correction/

growth fears

� Sharp corrections in global markets have been observed in the past with significantly varied recovery periods

� In fundamentally stable environments, recoveries were quick and sharp (e.g. spring 2006 “growth fears” correction)

� With deteriorated fundamentals, recoveries were more lengthy (e.g. Russian crisis, dot-com bubble as well as potentially the current situation)

� Currently, significant uncertainties persist on the geopolitical, macro and markets front. In the absence of significant catalysts, markets are not expected to embark on a

consistent recovery trajectory until 1H 2009

Dec-08

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… with credit markets having witnessed unparalleled disturbance, leaving lenders in great uncertainty

Source: MorganMarkets, as of 05-Dec-2008

J.P. Morgan Global / Euro High Yield IndexJ.P. Morgan Global / Euro High Yield Index

� Spreads in the European high yield universe reached all-time highs in October, easily exceeding post-09/11 levels

� The secondary loan and high yield trading desks saw almost only sellers in October, putting prices under extreme pressure

� The TED-Spread reached its all-time peak in October, before dropping more than 50% within days following Fed interventions

Source: International Index Company, as of 05-Dec-2008

72

74

76

78

80

82

84

86

88

90

92

94

96

98

100

102

104

106

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Dec-08

Senior Series 1 (170bps)

Senior Series 2 (525bps)

Senior Series 3 (575bps)

77.5

0

500

1000

1500

2000

2500

99 00 01 02 03 04 05 06 07 08

JPM Global HY Index STW

JPM Euro HY Index STW

1877 bps

2153 bps

Corporate Scandals

(Enron, Worldcom)

Sep-11 terror attacks

Previous peak levels

bps

?

European Leveraged Loan CDS Index (LevX)European Leveraged Loan CDS Index (LevX)

?

Source: MorganMarkets, as of 05-Dec-2008

0

50

100

150

200

250

300

350

400

450

500

00 01 02 03 04 05 06 07 08

TED Spread (Treasuries vs. US$-Libor) TED Spread (Treasuries vs. US$-Libor)

?219bps

All-time peak on 10-Oct-

2008(459bps)

bps

Lehman

bankruptcy

Implied spread in the range of 1500-

1600bps²

Lehman

bankruptcy

Lehman

bankruptcy

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Write-downs as percentage of total market capitalisationWrite-downs as percentage of total market capitalisation

Source: Bloomberg, Factset based on market cap as of December 11, 2008

258%

151%

112%

101%

56%

45%

33%

17%

16%

$58.1bn

$68.1bn

$44.2bn

$8.2bn

$15.7bn

$11.7bn

$20.5bn

$13.7bn

Total write-downs in $bn

∞

$27.4bn

$4.9bn

The crisis triggered unprecedented write-downs …

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40

8285828585

121

240

168

274

0

50

100

150

200

250

300

Market capitalisation of selected banks ($bn)Market capitalisation of selected banks ($bn)

Source: Factset as of December 11, 2008 Decline in share price in %

Take-overby BofA

Chapter 11

WarrenBuffet Mitsubishi

Jan 1, 2008 Nov 25, 2008

(65%) (75%)(67%)(25%) (100%)(82%) (73%)(67%)(83%) (64%)

023

125

84

39

2116

2845

31

0

50

100

150

200

250

300

… and changed the global banking picture

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Major national plans have been fathered in order to support financial institutions across Europe and the United States

UKUK

� Liquidity guarantee schemes of £200bn provided by BoE

� State funds for max. £50bn to recapitalise banks

� £250bn to guarantee inter-bank lending and new debt issuance

� Nationalisation of some banks

FranceFrance

� €320bn for the guarantee on new banks’ debt

� €40bn available for banks’capital increases� €10.5bn already injected

in six French banks� Dexia

PortugalPortugal

� Liquidity guarantee scheme of €20bn

SpainSpain

� €30-50bn available between 2008-09 for capital injections in Spanish banks

� €100bn fund to secure new debt issuance

Denmark

Austria

Spain

France

Portugal

BelgiumIreland

UnitedKingdom

Netherlands

Luxembourg

Switzerland

Italy

Germany

Sweden

Norway

Poland

CzechRepublic

SloveniaCroatia

480

70

150

360

216

100

NetherlandsNetherlands

� €200bn guarantee fund for inter-bank lending

� State fund of €20bn for capital injections in fin. inst.

� €16.8bn for the acquisition of Fortis Netherlands (incl. ABN)

GermanyGermany

� €400bn guarantee schemes for debt securities/deposits

� State fund of €80bn to recapitalise banks and to arrange asset swap agreements with banks

AustriaAustria

ItalyItaly

� State funds to recapitalize banks (c.€20-30bn)

� Temporary repo facilities from the Treasury (for a non-quantified amount) and the Central Bank (for c.€40bn)

Source: government press releases, press and Factiva¹ Data in euro: exchange rates €1.20/£, €0.65/CHF, €0.80/US$² Does not include government guarantees on Dexia’s debt and state deposit guarantee

A total of more than €2.4trn committed at European level, US$1.5trn in USA total of more than €2.4trn committed at European level, US$1.5trn in US

� Liquidity guarantee schemes of €75-85bn

� State fund of €15bn to recapitalise banks

� Nationalisation of some financial institutions

600¹

16²

BelgiumBelgium

� Capital injection for the rescue of several fin. inst. (Fortis, Dexia, KBC, Ethias)

� Guarantee on debt and toxic assets-related commitments of some banks (i.e. Dexia)

20 United StatesUnited States

� Troubled Asset Relief Program makes available up to US$700bn for banks recapitalisations, liquidity lines and asset purchases

� TALF: up to US$800bn from Fed and UST to support new ABS issuances and acquire GSE’s debt and Agency-MBS

SwitzerlandSwitzerland

� CHF6bn capital injection in UBS via a mandatory convert.

� US$54bn loan to a SPV to take over US$60bn of toxic assets from UBS balance sheet

47

IrelandIreland

� €400bn liquidity guarantee scheme for six Irish banks

400

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Source: Company information, press release and pressExchange rate used: €1.20/£, €/1.5CHF¹ Price at which the Dutch government purchased on October 3, 2008 Fortis’ banking and insurance activities in the Netherlands from Fortis Group² Includes the first €4.7bn capital injection of the Belgian government in Fortis Belgium and the second €4.7bn injection made before selling 75% of the company to BNP Paribas ³ Includes both capital injection in form of preference shares and underwriting of common shares issuances

Key capital injections realised by European governments (€bn)Key capital injections realised by European governments (€bn)

European governments supported major capital infusions

6.6

13.8

3.0 2.6 3.01.2 1.7

2.0

1.5

3.5

10.0

3.0

2.5

0.4

4.02.7

1.5

8.210.0

UK France Belgium NetherlandsLuxembourg Switzerland Austria Germany

¹

³

16.8

(29-Sep)(30-Sep) (13-Oct) (13-Oct) (13-Oct) (16-Oct)(19-Oct)(20-Oct) (20-Oct)(20-Oct) (20-Oct) (27-Oct) (28-Oct)

24.0

³³

(30-Oct) (03-Nov)

In the process of being merged

(20-Oct)

²9.4

(28-Nov)(05-Dec)

4

4 €7.0bn provided by the State of Bavaria, former core shareholder of BayernLB 7T

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De-leveraging across the banking sector will require higher capital levels after the crisis De-leveraging across the banking sector will require higher capital levels after the crisis

Banking leverage after the crisis will be significantly lower and the competition is setting new capitalisation benchmarks

� Abbey: Tier 1 ratio to 9.25% after a £1bn capital injection from Santander

� Barclays: Tier 1 ratio above 11%1,2 by raising £6.5bn in the markets

� RBS: Tier 1 ratio of 12.7%1,2 after a £20bn capital injection by the UK

government

� Combined Lloyds TSB / HBOS: Core Tier 1 ratio of 8.5%¹ after the £17bn

capital injection by UK government

¹ Pro-forma estimate; source: banks and press2 As of 30 June 2008

9-13% Tier 1 ratio

� Bank of America: Tier 1 ratio of 9.5%¹ after a $20bn injection

� Citibank: Tier 1 ratio of 10.8%¹ after a $25bn injection

� J.P. Morgan: Tier 1 ratio of 10.9%¹ after a $25bn injection

� Wells Fargo: Tier 1 ratio of 9.8%¹ after a $25bn injection

� BNP Paribas: Tier 1 ratio of 8.1%¹,² after intended issuance of €2.55bn hybrid

debt to the French government

� Crédit Agricole: Tier 1 ratio of 9.8%¹,² after intended issuance of €3.0bn

hybrid debt to the French government

� Société Générale: Tier 1 ratio of 8.7%¹,² after intended issuance of €1.7bn

hybrid debt to the French government

8-10%Tier 1 ratio

10-11% Tier 1 ratio

� KBC: Bank Core Tier 1 ratio of 8.2%¹ and Tier 1 ratio of 10.7%¹ after the

issuance of €3.5bn of non-transferable, non-voting core-capital securities to

the Belgian State

� ING: Bank Core Tier 1 ratio of c. 8%¹ and Tier 1 ratio over 10%¹ after issuing

€10bn of Core Tier 1 securities to the Dutch State

10-11%Tier 1 ratio/

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US and German main interventions to support domestic banks

Main available measures (November 25, 2008)Main available measures (November 25, 2008)

Main aspects of the intervention (October 13, 2008)Main aspects of the intervention (October 13, 2008)

� Recapitalisation

� Participation via common / preferred shares, participation

certificates or silent participations

� Up to 50% of registered capital for shares

� Exclusion of subscription rights

� No approval from general meeting

� Total amount max. €80bn2

� Guarantee

� Government guarantee for debt securities and deposits up to a

maturity of 36 months

� Guarantee fee generally amounting to not less than 2% p.a.

� Total guarantee amount max.

€400bn

� Risk transfer

� Transfer of risk assets such as receivables, securities and derivatives

� Does not required the debtors approval

� Total amount max. €80bn¹

Source: German law, government press releases, press1 Term Asset-Backed Securities Loan Facility2 For recapitalisation and risk transfer

� TALF1

� Under the TALF, the Fed will lend up to US$200bn on a non-recourse

basis to holders of certain AAA-rated ABS backed by newly and

recently originated consumer and small businesses loans. New loans

will be granted until Dec 2009

� GSE’s debt and MBS purchase program

� The Fed will purchase, through a series of competitive auctions

starting in Dec 2008, up to US$100bn of GSE’s direct obligations

� The Fed will also initiate by 2008 year-end a US$500bn mortgage-

backed securities purchase program, on a competitive basis, from

Fannie Mae, Freddie Mac and Ginnie Mae

1

2

3

Main available measures (October 14, 2008)Main available measures (October 14, 2008)

� Capital purchase program

� Treasury to purchase senior preferred shares from eligible banks up

to US$250bn (funded from the US$700 EESA rescue package)

� Treasury to receive also warrants for the participating banks’

common shares

� Commercial paper funding facility

� Federal Reserve to initiate between October 27, 2008 and April 30,

2009 a funding facility program by purchasing unsecured and asset-

backed US dollar-denominated three month commercial paper from

eligible US issuers (including US issuers with a foreign parent)

� Liquidity guarantee program

� FDIC to guarantee newly senior unsecured debt issued by banks,

thrifts and certain holding companies on or before June 30, 2009.

The guarantee will be limited up to June 30, 2012

1

2

3

1

2

Available measuresAvailable measures

� Establishment of a fund for the stabilization of the financial markets

by resolving the current liquidity shortfall and strengthening of

financial institutions’ capital base

GermanyGermanyUSAUSA

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“Good Bank/Bad Bank” structures can be used to clean-up the balance sheet

Börsen-Zeitung, 10.12.2008

WestLB will weiteres Portfolio auslagern

Aufsichtsrat tagt am Freitag - S&P im Nacken

Börsen-Zeitung, 10.12.2008 ab Düsseldorf - Der Aufsichtsrat der

WestLB wird sich am kommenden Freitag mit möglichen Wegen

zur Rekapitalisierung der Bank beschäftigen. Nach

Informationen der Börsen-Zeitung geht es dabei jedoch nicht

um Maßnahmen im Rahmen des Sonderfonds

Finanzmarktstabilisierung (Soffin), sondern vor allem um die

Auslagerung eines weiteren Portfolios risikobehafteter

Wertpapiere.

Pressemitteilung, 1. Dezember 2008

BayernLB stellt sich neu auf—

Bank fokussiert sich auf Kernaktivitäten

� Fokussierung auf Bayern, Deutschland und ausgewählte

europäische Regionen

� Klare Konzentration auf die Kerngeschäftsfelder Mittelstand,

Großkunden einschließlich Institutionelle Kunden und

Sparkassen,Gewerbliche Immobilien und Privatkunden

� Konsequente Trennung von langfristig nicht profitablen

Aktivitäten

� Signifikante Kosteneinsparungen und Effizienzsteigerungen

� Good Bank sells portfolio of non-strategic assets to “Bad

Bank” vehicle

� Bad Bank doesn’t necessarily need banking license

� Good Bank’s owners purchase Bad Bank's "equity“

� Retain asset upside

� Various options for Bad Bank senior funding:

� If no loss on asset sale, then likely improvement in

capital ratios

� Size of improvement depends a.o. on reg cap

treatment of senior financing provided by Good Bank

� Key drivers for size of Bad Bank equity:

� Good Bank no longer owning “majority of risks &

rewards” (cash flow based analysis)

� Senior debt rating requirements (if relevant)

� Desired market signalling

Description “Good Bank/Bad Bank” structures Description “Good Bank/Bad Bank” structures

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The financial crisis has discharged into a global recession in all centres of the world significantly affecting consumer confidence

Business confidence Business confidence

US consumer confidenceUS consumer confidence

Source: Bloomberg (NTC Economics), ISM, ACEA, AutoStat, US Bureau of Economic Analysis, SIAM and University of MichiganNote: Business confidence below 50 indicates contraction ¹ Compares October based SAAR numbers (annualised actual October sales for Western European and BRIC countries) with 2007A full year actual sales figures² Represents only sedans³ The index is normalised to have a value of 100 in December 19644 Long-term average is (10)

3040

5060

7080

01/02 01/03 12/03 12/04 12/05 12/06 11/07 11/08

US (ISM Manufacturing Survey)

Eurozone (Purchasing Managers’ Index)

80100120140160180

01/02 12/02 12/03 12/04 11/05 11/06 11/07 11/08

University of Michigan Consumer Sentiment Index³

Light vehicle sales Light vehicle sales

Impact magnified in countries with high consumer debt levels and

falling house prices

EU consumer confidenceEU consumer confidence

(30)

(20)

(10)

0

01/02 12/02 12/03 12/04 11/05 11/06 11/07 11/08

ESI Consumer Confidence Indicator4

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Sales (K units) 2008 Y/Y change (%)

Region/country Sep Oct Nov Sep Oct Nov Full¹

West. Europe 1,213 1,035 867 (9%) (15%) (25%) (16%)

France 161 175 146 8% (7%) (14%) 2%

Germany 261 259 234 (2%) (8%) (18%) (1%)

Italy 176 168 138 (6%) (19%) (29%) (19%)

Spain 66 78 63 (32%) (40%) (50%) (42%)

UK 330 128 100 (21%) (23%) (37%) (36%)

BRIC

Brazil/Arg. 332 273 N/A 38% (3%) N/A 13%

China² 416 410 N/A (2%) 12% N/A 4%

India 109 99 N/A 3% (7%) N/A (17%)

Russia 240 232 N/A 13% (1%) N/A 15%

United States 962 835 744 (27%) (32%) (37%) (35%)

A significant de-leveraging process is under way …

Historical supply (€bn eq.) vis-à-vis interest rates (%) and credit spreads performance (bp)

Source: J.P. Morgan and Dealogic; Federal Reserve

Note: Includes EUR and GBP supply by Corporates and Financials

376

238

417 390

511

210249

102

139

136

131

165

186

186

250

89

264

312

408

233

318 28

256

23

278

431

298

394

540

424

603

646

761

447

372

420

1H 2003 2H 2003 1H 2004 2H 2004 1H 2005 2H 2005 1H 2006 2H 2006 1H 2007 2H 2007 1H 2008 2H 2008

ECB

Banks Senior

Bonds ABS

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Jan-03 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08

0

50

100

150

200

250% bp

1,500

1,700

1,900

2,100

2,300

Sep-06 Dec-06 Mar-07 Jun-07 Oct-07 Jan-08 Apr-08 Jul-08 Nov-08

US$ bn Outstanding USCPs

Case-Shiller House price Index

Max = 207

162

136

Dec-08

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Maturity profile of loans to European IG CorporatesMaturity profile of loans to European IG Corporates

… hampering banks’ willingness to lend

30% of existing loans in EMEA mature by 2009, 50% by 2010

Trend of loan margin for 364-day tenor 2003—2008Trend of loan margin for 364-day tenor 2003—2008

14%

14%

18%

21%

9%

14%

13%

23%

53%

44%

42%

33%

15%

13%

11%

5%

10%

15%

16%

18%

2005

2006

2007

2008

<1 year 3-year5-year 7-yearOff the run maturities

0

20

40

60

80

100

120

140

160

180

Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Nov-08

A BBB I-traxx Main Indexbps

Source: Dealogic—LPC – J.P. MorganSource: Dealogic—LPC1 Off the run maturities mean maturities different of 364-day, 3-, 5- or 7-years

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Note: Highlighted marks J.P. Morgan led transactions

Although public bond activity has picked up in Europe in recent weeks several themes still prey on investor minds

H2 2007H2 2007 H2 2008H2 2008

Issuer Date Rating Size (m) Tenor Pricing

20-Nov-08 Baa2/BBB+ €500 5-year MS+590

19-Nov-08 Baa1/BBB+ £250 20-year G+400

17-Nov-08 A2/A €1,000 2-year MS+150

13-Nov-08 A2/A- €750

€750

5-year

10-year

MS+230

MS+270

BMW 13-Nov-08 A2/A €750 5-year MS+525

12-Nov-08 A1/A €1,000

€1,000

5-year

10-year

MS+215

MS+255

Selected priced transactions in GermanySelected priced transactions in Germany

Issuer Date Rating Size (mm) Tenor Pricing

€1,750 5-year MS+60

20-Sep-07 A2/A

€1,750 10-year MS+85

19-Sep-07 Aa3/AA- €1,000 7-year MS+52

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Secondary spread updateSecondary spread update

Issuer Rating Size (€mm) Coupon (%) Maturity

z-spread

10 Dec

2008 (bp)

z-spread

3 Dec

2008 (bp)

z-spread

Jan 2008 (bp)

Change today

vs. Jan 2008 (bp)

Lanxess Baa2/BBB 500 4.125 21-Jun-12 440 433 109 +331

Lafarge Baa2/BBB 750 5.750 27-May-11 628 620 NA NA

Bayer A3/A- 2,000 6.000 10-Apr-12 196 187 70 +126

Clariant Baa3/BBB- 600 4.375 05-Apr-13 863 857 157 +706

Lufthansa Baa3/BBB 500 4.625 06-May-13 213 246 96 +117

DSM A3/A- 300 4.000 10-Nov-15 188 216 85 +103

Source: Bloomberg

Credit spreads already price in an increase in default rates …

Global high yield spreads and corporate default ratesGlobal high yield spreads and corporate default rates

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009

0%

2%

4%

6%

8%

10%

12%

14%

16%

25-Aug—31-Aug-98:turmoil in Russia; LTCM meltdown

Sep-11 terror attacksCorporate Scandalseg. Enron/ WorldcomBurst of dot com

bubble; high-yield defaults rise for third consecutive year

Oct-87: Stock market loses 504 points

Jan-91:US attacks Iraq

Drexel files for bankruptcy

RJR buyout

Global high-yield spreads (bps) Default rates (%)

General Motors and Ford credit uncertainty

Historic lows

Average default rates

Long term average spread

878bps

1.19%

Source: Thomson Financial

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… with large restructuring to be expected over the next years

Source: Alix Partners, J.P. Morgan Credit Research

Default rate and distressed debt volumeDefault rate and distressed debt volume

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007E

2008E

2009E

2010E

2011E

2012E

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000Speculative grade default rate (in%) Distressed debt volume ($bn)

2,000

4,000

1,207

2,106

517

11.1%

2.9%

5.0%

10.0%9.5%

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Curr. 4Q08 1Q09 2Q09 3Q09

Repo rate (%) 3.00 2.00 1.50 1.00 1.00

3m LIBOR (%) 4.04 3.20 2.25 1.85 1.95

10yr govt. (%) 3.86 3.20 2.25 1.85 1.95

Curr. 4Q08 1Q09 2Q09 3Q09

10yr swap spread (bp) 24 10 5 (3) (3)

Curr. 4Q08 1Q09 2Q09 3Q09

Refi rate (%) 3.25 2.75 2.00 1.25 1.00

3m EURIBOR (%) 4.00 3.40 2.30 1.75 1.55

10yr govt. (%) 3.39 3.15 3.00 2.95 2.95

Curr. 4Q08 1Q09 2Q09 3Q09

10yr swap spread (bp) 61 40 35 30 25

Curr. 4Q08 1Q09 2Q09 3Q09

Fed funds rate (%) 1.00 0.50 0.00 0.00 0.00

3m LIBOR (%) 2.18 1.80 1.45 1.30 1.15

10yr govt. (%) 2.98 3.00 2.80 2.50 2.35

Curr. 4Q08 1Q09 2Q09 3Q09

10yr swap spread (bp) 20 25 20 20 20

$ rate forecasts$ rate forecasts 50bp cut expected in fourth quarter

€ rate forecasts€ rate forecasts 50bp cut expected in fourth quarter

Foreign exchange forecastsForeign exchange forecasts $ strength to remain in the interim

£ rate forecasts£ rate forecasts 100bp cut expected in fourth quarter

Curr. 4Q08 1Q09 2Q09 3Q09

EUR/USD 1.30 1.18 1.18 1.20 1.22

USD/JPY 105 87 87 93 95

GBP/USD 1.53 1.33 1.28 1.32 1.36

Looking forward, the debate around the depth and length of a broad recession will drive market sentiment …

Economic outlookEconomic outlook

%q/q 3Q08 4Q08 1Q09 2Q09 3Q09

Euro area (0.3) (4.0) (3.0) (0.5) 1.5

US (2.1) (2.5) (2.0) 0.0 0.5

UK (2.0) (3.0) (2.5) (1.5) 0.0

Japan (0.4) (3.5) (3.0) (0.5) (1.2)

Real GDP forecastsReal GDP forecasts Global recession now expected

US market update

� The October employment report was one of the worst ever published in the US.

Unemployment has risen in last six months by 1.5%—fastest rate since early 1980s. Payrolls declined 240k, further than expectations, with also downward

revisions in September numbers

� Barack Obama’s first conference as president-elect, promised confrontation of this economic crisis, going forward we can expect large fiscal packages in the new year from his new administration

Euro market update

� Europe’s economy fell into its first technical recession in 15 years in 3Q 2008

� Different countries are faring better than others, with Germany leading the

way, but the overall picture shows a consistent message

� The ECB cut in line with expectations at its November monthly meeting by 50bp, despite the discussed possibility of a 75bp cut

UK market update

� The recent 150bp base rate cut was beyond market expectations, and the largest cut made by the independent body in its 10 year history. Interest rates

in the UK are now the lowest that they have been since 1954

� In their latest inflation report the bank expects inflation to fall below the 1% floor towards the end of 2009, reflecting expectations of deep recession in 2009

� Poor economic data triggered the pound to fall below $1.50 for the first time in

six years, and reached historic lows against the Euro

Source: J.P. Morgan research (as at 26 November 2008)

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… central banks are easing to jumpstart the economy, sending base rates to historic lows …

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Jan-51 Apr-58 Jul-65 Sep-72 Dec-79 Mar-87 May-94 Aug-01 Nov-08

UK Bank of England base rate UK Bank of England base rate

Source: Bank of England statistics (as at 26 November 2008)Note: Changes through bank rate, minimum lending rate, minimum dealing rate, repo rate

6 November 2008: 3.00%13 May 1954—27 Jan 1955: 3.00%

� Recent sharp fall in core inflation

� Oil prices now levelling out—near

term deflation unlikely?

� In the medium term, however,

deepening recession and rising

unemployment rate is putting

further downward pressure on

already low price levels (i.e. high

medium term risk of deflation)

Inflation / deflation?

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… the two key factors for the economy will be de-leveraging and policy support …

De-leveraging—source of all doom?De-leveraging—source of all doom? Policy supportPolicy support

� Markets have seen 20-years of increasing leverage

� Household sector saw real estate boom

� Corporate sector saw cheap debt, M&A and share

buybacks

� World is now seeing a sea-change as all participants

are increasing savings rates and cash holdings whilst

paying off debt

� Will depress asset prices and economic activity

� De-leveraging process will drive the depth and length

of the economic crisis (impact on GDP and

unemployment)

� Significant policy support acts in two main ways

� Limiting de-leveraging process—e.g. by

guaranteeing banking sector or purchasing

distressed assets combined with monetary easing

� Off-setting impact of de-leveraging on growth via

fiscal easing

� Deleveraging process is progressing strongly, led by

financial sector

� Both fiscal and monetary policy will hopefully create

a rebound in economic activity towards middle of

2009 as stress in financial sector eases and consumer

confidence returns

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… and companies will need to be nimble and flexible in order to weather the difficult environment

Government interventionGovernment intervention

Hedge fund unwinds

Hedge fund unwinds

Continued economic

stress

Continued economic

stress

Impact on valuations

Impact on valuations

Pressure on corporate earnings

Pressure on corporate earnings

Impact of bank cost of funds

Impact of bank cost of funds

Impact of supply on markets

Impact of supply on markets

Flexibility around amount, currency and

maturity

Flexibility around amount, currency and

maturity

CAPEX, disposalsCAPEX, disposals

DividendsDividends

Share buybacksShare buybacks

Equity volatilityEquity

volatility

Debt markets —focus on access not

cost

Economic backdrop and corporate health

Corporate strategy—focus on cash

Evolving market backdrop

Liquidity is king!

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Quarter-by-quarter trend since 2003 (any European involvement)Quarter-by-quarter trend since 2003 (any European involvement)

Note: Deal value $bn in the bars

M&A volume has decreased in the first three quarters of 2008 but is still on 2006 level

32 38 32 49 43 44 42 61 53 67 58 76 67 70 73 86 87 87 86 93 92 77 6315 26 1821 30 29 41

41 3637 31

40 42 56 4472 53 73 68 62 55 63

4616

16 1718 20 20 19

21 2223

2427 23

25 26

2625

27 33 31 30 3024

6057 86

93 7746

74

13599

137 170159

126

179 167

241227

340

188

272

174149

164

44

24 71

10

17

4176 38

101 212 6651

112

94

318

125

230

85

211

39

187

107

24

0

100

200

300

400

500

600

700

800

900

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Less than 100m 100m to 500m 500m to 1bn 1bn to 10bn Over $10bn

?

2003 2004 2005 2006 2007 2008

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“BANK OF THE QUARTER”

“J.P. Morgan earns reputation as white knight

to other banks”

“Over the past quarter J.P. Morgan has gained the reputation as the bank

other banks go to when they are in trouble.”

$19.7bn

The largest ever US IPO and second largest IPO globally

Launched on 19 March 2008

Initial Public Offering

Lead Left Bookrunner

€5.5bn Launched on 11 February 2008

Rights Issue

Joint Global Coordinator & Joint Bookrunner

J.P. Morgan agreed within 6 hours to underwrite €2.76bn

$2.1bnLaunched on 17 March 2008

J.P. Morgan acquires Bear Stearns

J.P. Morgan white knight acquirer of Bear Stearns

$15.4bn Launched on 21 May 2008

Rights issueJoint Global Coordinator & Joint Bookrunner

Significant capital commitment to UBS at a critical time

J.P. Morgan—a distribution power house

$54.8bn ($9.8bn equity bridge) Launched on 14 July 2008

Financing package

Joint bookrunner

$54.8bn financing of InBev’s acquisition of Anheuser-Busch is the largest all-cash transaction on record

$1.9bnLaunched on 16 September 2008

J.P. Morgan acquires Washington Mutual

J.P. Morgan white knight acquirer of Washington Mutual

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