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Are We No Longer the World’s Financial Capital?

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New Yorkers often imagine their city, like the famous New Yorker cover, at the center of the world. But it isn’t—London is. Look at a map. America is on the left, Asia on the right, and in the middle is Europe.

London has always depended on trade and immigration. Even in the nineteenth century, the City was dominated by foreigners, such as George Peabody, an American who was the London partner of J.P. Morgan’s father, and Mayer Amschel Rothschild, a German financier. But after war engulfed Europe in 1914 and the City turned inward, it lost its place in global finance to New York.

Seventy years later, U.S. banks sensed an opportunity in London again when Margaret Thatcher deregulated the City. “I remember talking to the head of Goldman Sachs in 1982,” says Richard Lambert, director-general of the Confederation of British Industry. “He said, ‘One day, we are going to be as big in the rest of the world as we are in New York.’ I thought to myself, You silly prat, what about Hill Samuel?” (Hill Samuel was then one of the biggest investment banks in the City.)

The British hold on the City soon cracked. By the late nineties, after Citigroup bought Schroders and the Swiss Bank Corporation (which later merged with UBS) bought S. G. Warburg, there was a flurry of anxiety that the City was no longer British owned. It became known as “Wimbledonisation,” after the tennis tournament in southwest London, which was last won by a British man—Fred Perry—in 1936. The British can host a fine tournament, the joke went, but they cannot win themselves.

“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.”

But Wimbledonisation turned out to work brilliantly in London’s favor. The City enticed U.S. banks, which led the world in financial innovation, to bring their expertise to London. There were not enough qualified Brits to fill all of the new jobs, and the U.S. banks wanted some from each European country. A gold rush ensued.

“Hold on, I’m just standing here counting,” David Verey, senior adviser at Blackstone’s London office, says in the middle of a telephone conversation. “The chap in the office next to mine is Italian, then there’s an American, a German, an Austrian, Portuguese, Spanish. They are all about 12 and a half and very clever. It is amazing.”

The influx of so many sophisticated immigrants has changed the fabric of London. Wealth has rippled through the city as it did through New York in the nineties, bringing shops, restaurants, and art galleries to Notting Hill, Mayfair, and Kensington in the west, and Spitalfields and Hoxton in the east.

“I left London in the late eighties and worked in Hong Kong and New York for seventeen years. I was astounded by how much had changed when I came back,” says Huw Jenkins, head of investment banking for UBS. “It is a much more appealing place for a young international nomad to live. New York is a lot safer than it was but perhaps a bit less cutting-edge in terms of arts and food.”

Ouch.

As London flourished, New York suffered two blows to its status. The first came on September 11, 2001. The act of terrorism did not in itself undermine Wall Street—it’s worth noting that London was hit by suicide bombings on the Underground in July 2005 without City businesses being much affected—but the U.S. reaction did.

Businesses suddenly had to struggle to get visas for employees to work in New York—or even to visit on business trips. “To get into America, you have to have a blood test and get your granny’s name tattooed on your forehead,” jokes Lambert. Meanwhile, visas for Britain have remained easily available.

The second blow was the collapse of Enron and WorldCom and a regulatory backlash against companies and financial institutions. The Sarbanes-Oxley Act required all U.S.-listed companies, whether foreign or not, to spend a lot of time and money strengthening internal controls. Meanwhile, Eliot Spitzer, as New York’s attorney general, had started publicly to investigate and shame banks for malpractices.

This reassured investors in the U.S., but it had a chilling effect abroad. The impression it gave overseas was that regulation in the U.S. was at best, as Lambert puts it, “a pain in the arse” and at worst meant Spitzer, or one of his regulatory rivals, would be bursting through the door.

Bloomberg and Schumer have responded aggressively. They commissioned a $600,000 study by McKinsey & Co., the consultancy, of possible changes of immigration controls and how Sarbanes-Oxley is implemented. Last month, the mayor made a highly publicized visit to London (“Bigger, better, richer, faster,” gloated The Guardian). Others are seeking curbs on lawsuits against corporations and less-aggressive regulation. In Washington last Tuesday, Paulson called for a more business-friendly approach to U.S. financial regulation.


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