Are We No Longer the World’s Financial Capital?

Photo: Nick Turpin

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.”

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.”


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.

Some skeptics suspect that New York’s bankers are exploiting the specter of London’s growth to sweep away regulations they did not like anyway. They even say that New York may be better off without some of the companies, and the investors, that have flocked to London.

“I think this is a false issue,” says Jeffrey Garten, a professor of international economics at Yale University. “When you analyze why London is getting more than its share of IPOs, you realize that a lot of them really should not be listed in the U.S., given our tradition of investor protection. Many come from emerging markets, particularly Russia and China. By any standards, they lack accounting rigor and transparency.”

The modern City of London is certainly exotic. After the U.S. security crackdown following 9/11, billions of dollars in Middle Eastern oil money were transferred to London, and many Russian and eastern European billionaires also hold assets there. The fatal poisoning of Alexander Litvinenko, a former Russian spy, with polonium-210, in London in November showed that it is home to plenty of intrigue.

So investors (and Russian spies) are probably better protected in New York. But that is not everything. London has taken the qualities associated with New York—openness to immigrants and unfettered free enterprise—and stretched them beyond what even the U.S. now tolerates. New York can look parochial by comparison.

“The single biggest issue [for New York’s competitiveness] is the hardest to change,” says John Thornton, chairman of the Brookings Institution and a former president of Goldman. “Americans as a culture are insular and essentially hold the point of view that the way we do things is the best. The U.S. market is deep enough and the country is big enough that, in many cases, they can go about their business without worrying.”

They ought to worry more. As capitalism spread around the world, New York could never have hoped to maintain its unchallenged position in the global financial order. But the U.S. has been complacent in allowing London to outflank it as a cosmopolitan city.

If New York lets itself retreat further into being just America’s financial center, it will lose some of the qualities that made it great in the twentieth century. “We are not doing them a favor. They are doing us a favor,” says Bloomberg of the foreigners who want to come here.

Indeed so. Once, they might have waited patiently for the privilege of being New Yorkers. These days, London beckons.

John Gapper is a columnist for the Financial Times, based in New York.

Are We No Longer the World’s Financial Capital?