Excess Liquidity (03.07.2011) v2 santev 8 Mar 2011 12:42 1/4 Excess Liquidity Our most important liquidity policy is to pre-fund our estimated potential cash needs during a liquidity crisis and hold this excess liquidity in the form of unencumbered, highly liquid securities and cash instruments. This “Global Core Excess” (“GCE”) is intended to allow us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets. We believe that this pool of excess liquidity provides us with a resilient source of funds and gives us significant flexibility in managing through a difficult funding environment. Our GCE reflects the following principles: • The first days or weeks of a liquidity crisis are the most critical to a company’s survival. • Focus must be maintained on all potential cash and collateral outflows, not just disruptions to financing flows. Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. • During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. • As a result of our policy to pre-fund liquidity that we estimate may be needed in a crisis, we hold more unencumbered securities and have larger debt balances than our businesses would otherwise require. We believe that our liquidity is stronger with greater balances of highly liquid unencumbered securities, even though it increases our total assets and our funding costs. In order to determine the appropriate size of our GCE, we use an internal liquidity model, referred to as the Modeled Liquidity Outflow, which captures and quantifies the firm’s liquidity risks. We also consider other factors including but not limited to a qualitative assessment of the condition of the financial markets and the firm. Excess Liquidity (03.07.2011) v2 santev 8 Mar 2011 12:42 2/4 Excess Liquidity (Continued) Our Modeled Liquidity Outflow is based on a scenario that includes both a market-wide stress and a firm-specific stress, characterized by some or all of the following elements: • Global recession, default by a medium-sized sovereign, low consumer and corporate confidence, and general financial instability. • Severely challenged market environment with material declines in equity markets and widening of credit spreads. • Damaging follow-on impacts to financial institutions leading to the failure of a large bank. • A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade. The following are the critical modeling parameters of the Modeled Liquidity Outflow: • Liquidity needs over a 30-day scenario. • A two-notch downgrade of the firm’s long-term senior unsecured credit ratings. • No support from government funding facilities. Although we have access to various central bank funding programs, we do not assume reliance on them as a source of funding in a liquidity crisis. • A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a crisis. • No diversification benefit across liquidity risks. We assume that liquidity risks are additive. • Maintenance of our normal business levels. We do not assume asset liquidation, other than the GCE. Excess Liquidity (03.07.2011) v2 santev 8 Mar 2011 12:42 3/4 Excess Liquidity (Continued) The table below presents the fair value of the securities and certain overnight cash deposits that are included in our GCE. Average for the Year Ended December in millions 2010 2009 U.S. dollar-denominated $ 130,072 $ 122,083 Non-U.S. dollar-denominated 37,942 45,987 Total $ 168,014 $ 168,070 The U.S. dollar-denominated excess is composed of unencumbered U.S. government obligations, U.S. agency obligations and highly liquid U.S. agency mortgage-backed obligations, all of which are eligible as collateral in Federal Reserve open market operations and certain overnight U.S. dollar cash deposits. The non-U.S. dollar-denominated excess is composed of only unencumbered French, German, United Kingdom and Japanese government obligations and certain overnight cash deposits in highly liquid currencies. We strictly limit our excess liquidity to this narrowly defined list of securities and cash because they are highly liquid, even in a difficult funding environment. We do not include other potential sources of excess liquidity, such as lower-quality unencumbered securities or committed credit facilities, in our GCE. We maintain our GCE to enable us to meet current and potential liquidity requirements of our parent company, Group Inc., and our major broker-dealer and bank subsidiaries. The Modeled Liquidity Outflow incorporates a consolidated requirement as well as a standalone requirement for each of our major broker-dealer and bank subsidiaries. Liquidity held directly in each of these subsidiaries is intended for use only by that subsidiary to meet its liquidity requirements and is assumed not to be available to Group Inc. unless (i) legally provided for and (ii) there are no additional regulatory, tax or other restrictions. Excess Liquidity (03.07.2011) v2 santev 8 Mar 2011 12:42 4/4 Excess Liquidity (Continued) In addition to our GCE, we have a significant amount of other unencumbered cash and financial instruments, including other government obligations, high-grade money market securities, corporate obligations, marginable equities, loans and cash deposits not included in our GCE. The fair value of these assets averaged $72.98 billion and $71.82 billion for the years ended December 2010 and December 2009, respectively. We do not consider these assets liquid enough to be eligible for our GCE liquidity pool and therefore conservatively do not assume we will generate liquidity from these assets in a short-term stress scenario.