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Are We No Longer the World’s Financial Capital?

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At 11:15 a.m. last Tuesday, as investors around the world took fright at the woeful state of the U.S. mortgage market and the Dow Jones Industrial Average started a 242-point plunge, Goldman Sachs made an announcement that hardly anyone noticed.

Wall Street’s preeminent investment bank disclosed that, for the first time in its 138-year history, its international revenue had matched that in the U.S. “The trends in virtually all of our businesses are to be growing faster outside the United States than within,” David Viniar, the firm’s CFO, told a group of analysts. “So 50 percent was really a matter of time. It was going to happen, and it has happened now.”

In New York, there were other things to fret about than the transformation of what was once a tiny Wall Street firm into a global investment bank. It was another story in Washington, D.C., where financial leaders from Warren Buffett to John Thain, chief executive of the New York Stock Exchange and a former president of Goldman, had gathered that morning to debate whether Wall Street was losing its grip.

They had been invited by Hank Paulson, Treasury secretary (and a former chairman of Goldman), after months of agonizing by Washington politicians and New York financiers about the city’s place in the world. After a century of dominating global finance, New York is facing a rivalry 3,500 miles to the east. When Viniar talks about growth outside the U.S., what he means above all is the City of London.

Goldman had only 50 employees in London a quarter of a century ago but now has 6,500 there, and the number keeps rising. Last week, it announced that it was moving John Waldron, one of its most talented young bankers, to London to work on a flood of private-equity takeovers in Europe. In February, it said that Edward Forst, its global chief administrative officer, will now be based in London.

This reflects the flow of business. Last year, there was a drought of initial public offerings by international companies on the NYSE. In the nineties, a listing in New York became a badge of honor for European and Asian companies. (European companies such as Daimler-Benz would go through a painful struggle to comply with U.S. generally accepted accounting principles to ring the opening bell above the NYSE floor.)

But companies have found other places to go for capital. Only one of the 24 biggest international IPOs in 2005 was in New York. The Industrial and Commercial Bank of China’s $21.9 billion IPO—the world’s largest ever—took place in Hong Kong and Shanghai, and London gained IPOs from Russia and East European countries. The FTSE 100 index of the U.K.’s most valuable companies now includes Kazakhmys, a Kazakhstan copper-mining group.

Just as worrying, London is rapidly emerging as a center of financial innovation. London-based hedge funds are snapping up property in Mayfair, and London has also outgrown New York to become the world’s center of over-the-counter derivatives. It is even showing signs of catching up with the U.S. in bond trading and securitization. While New York remains the financial center to beat, London has momentum.

Not everyone believes that this matters. London may be expanding faster, but Wall Street is still growing: The financial-services industry added 7,800 jobs in New York in the first eight months of 2006. Wall Street bonuses reached a record of $23.9 billion last year, with Lloyd Blankfein (Goldman’s chairman) alone taking home $53.4 million. “Look out of the window,” the chairman of one investment bank says dismissively. “There is money everywhere.”

But politicians from Michael Bloomberg to Chuck Schumer are concerned about London’s resurgence. Dan Doctoroff, New York City’s deputy mayor for economic development, watched London swoop past his city and Paris, the favorite, to gain the 2012 Summer Olympics. “It is easy to say New York is doing well now, but history is littered with companies, cities, and individuals who took their success for granted,” he says.

Over the past 30 years, Wall Street has played a pivotal role in New York’s transformation from a bankrupt, dangerous city suffering from middle-class flight to the suburbs to the wealthy, self-confident metropolis of today. As manufacturing jobs fell from a peak of about 1 million to 100,000, finance took up the slack. The industry now employs 328,400, some 171,000 on Wall Street, and accounted for 36 percent of the city’s business-income taxes in 2005. “After urban America was written off in the seventies, New York emerged as a global city on the back of financial services,” says Kathryn Wylde, president of the Partnership for New York City. “It’s impossible to overstate the industry’s importance to the city.”


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