Observations on current financial market disruptions and their implications

Presentation to the AHIA 2008 conference8 October 2008

Richard Sheppard, Deputy Managing DirectorMacquarie Group Limited

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Financial markets: 2007 – 08

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30-M

ar-07

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Wor

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Subprime fears

Northern Rock

Bear Stearns sold

US Fed announces credit facility for

banksUS Fed announces

willingness to lend to Fannie Mae and

Freddie Mac

Bear Stearns hedge funds

BNP funds suspended

European inter-bank lending halted

US Fed cuts rates

ECB allots extra funds

US Fed cuts rates

Central banks increase lending

Recession fears spark global share

crash

US Fed cuts rates

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Financial markets: September ’08 –October ‘08

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Fannie Mae and Freddie Mac placed in conservatorship

Bank of America to buy Merrill

Lynch

Lehman Brothers files for bankruptcy

US Fed bails out AIG

US Fed liquidity facilities

Lloyds TSB to buy HBOS Fortis nationalised

(Belgium)

Bradford & Bingley nationalised (UK)

Hypo Real Estate guaranteed by

German government

Dexia bailed out

JPMorgan to buy Washington

Mutual

US bail out package fails in Congress

ECB and Fed liquidity measures

CBA to buy BankWest

Iceland nationalises second largest bank

Russian liquidity measures

Citigroup and Wells Fargo battle to buy

Wachovia

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Debt markets are disrupted

Source: Bloomberg, Macquarie Research, October 2008

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Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08

0

50

100

150

200

250Aus US EU UK

LIBOR to 3m OIS spreadBps Bps

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The US Federal Reserve has been very active

Source: Federal Reserve, Macquarie Research, October 2008

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100

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200

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400

450

Sep 58 Sep 68 Sep 78 Sep 88 Sep 98 Sep 08

-50

0

50

100

150

200

250

300

350

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450US Federal Reserve Loans to Domestic Banks

Annualised $USbn Annualised $USbn

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Market volatility is not a new phenomenonVIX (Implied Volatility Index)

Source: CBOE, October 2008VIX index is the option implied volatility on the S&P500

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Jan-90 Oct-93 Jul-97 Apr-01 Jan-05 Oct-08

Daily

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Inde

x Index

Recession

Global real estate crash

Mexico

Asian financial

crisis

Russian debt crisis

LTCM collapse

Dot com crash

9/11US recession

SARSCredit market

disruption

7Source: ABS, Macquarie Research, October 2008

The Australian economy remains resilient

-1

0

1

2

3

4

5

6

7

Jun 98 Jun 00 Jun 02 Jun 04 Jun 06 Jun 08

-1

0

1

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7

Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08

QoQ YoY

Quarterly

% %Real GDP Growth

8Source: RBA, Macquarie Research, October 2008

Australia’s financial system is in good shape

Non-performing housing loans as % of on-balance sheet loans

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0.5

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1.5

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

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Australia UK US

Quarterly

% %

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Australian policy responses

The RBA has acted to increase liquidity

— US$30 billion swap line with the Federal Reserve

— Increase daily repurchase arrangements

This week’s RBA rate cut

RBA measures to expand domestic market facilities

The Federal Government allocated $A20 billion from the “Building Australia Fund” to national infrastructure projects at the October COAG meeting

$A4 billion fund to support the mortgage market

Prime Minister and Treasurer have emphasised the strength of Australian banks

Federal Budget and debt situation remains very strong

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Macquarie’s positioning

Remains profitable

Most of its operating income from products and services to clients

Long-term record of successful risk management

— No problem trading exposures

— No material problem credit exposures

— No material exposures to US financial institutions which have been the subject of recent stress.

Diversified by business mix and geography

Regulated by APRA, the Australian banking regulator, as the holding company of an Australian bank

Has grown through the cycle and market downturns have typically created opportunities.

Well-funded and well-capitalised

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Where to from here?

US Emergency Economic Stabilisation Act of 2008

— Enacted 3 October 2008

RBA cash rate

— Likely to be followed by earnings in other major economies

Greater regulation of the banking industry

Deleveraging

Slower global economic growth

More cautious approach to business investment and employment

Australia and Australian banks remain well placed

The cycle will turn, the issue is timing

Observations on current financial market disruptions and their implications

Presentation to the AHIA 2008 conference8 October 2008

Richard Sheppard, Deputy Managing DirectorMacquarie Group Limited