New York Will Lose Ground
From the February 11, 2007 Sunday Times (London)
February 12, 2007
by Irwin Stelzer
The competition between New York City and London threatens to get out of hand. New York mayor Mike Bloomberg, a billionaire capitalist, trekked to London to see how Red Ken Livingstone runs things. Well, not exactly. But he did come to see how Sir Callum McCarthy, chairman of the Financial Services Authority, is regulating the financial sector that seems to be wooing business from New York at an alarming rate. "London is gaining on us in area after area," moaned Bloomberg. Perhaps even more important, the ordinarily dull New York Times, under the headline "The Best Town to Make an Upper Lip Stiff", quotes New York saloon keeper Audrey Saunders as concluding: "London is the best cocktail city in the world right now. I hate to admit it, but it's true." It's one thing for a New York investment banker to lose a big deal to a London rival, quite another to know that the victor is celebrating in a bar superior to one in which the loser is drowning his sorrow.
Bloomberg's voyage of discovery was prompted by figures showing that Wall Street is losing its pre- eminence as a capital market to the City. This view is shared by Hank Paulson, Treasury secretary and former Goldman Sachs chief, and New York's two Democratic senators, presidential wannabe Hillary Clinton and Chuck Schumer. Even Eliot Spitzer, once the scourge of Wall Street and now governor of a state heavily dependent on the financial-services sector for tax revenues, lined up with regulation's critics for a photo opportunity when McKinsey unveiled its analysis of the reasons for New York's declining competitiveness.
What most troubles New Yorkers is that not only has London become a capital market of choice for more and more companies, but that the American press is reporting that London has succeeded New York as the world's most exciting city. New Yorkers like to boast about the high price of property in the city -although the boast is often thinly disguised as a complaint. But now they read that prices in their toney upper east side are lagging those in Belgravia. The Wall Street Journal reports that property in London SW1 fetched £ 1,450 per square foot ($2,863), 63% more than the cost of luxury condos in Manhattan. I doubt that the difference is that great, but for people who equate desirability with price, the large difference means that London is more desirable than the Big Apple. That is an idea New Yorkers have difficulty getting their heads around, to use the city's jargon.
In the hunt for villains, it is unsurprising that investment bankers will point to government regulation. Their complaint is that regulation is more onerous in America than in Britain, thanks largely to the Sarbanes-Oxley act. The cost of compliance, this argument goes, is so much higher in America than in Britain that it is only natural for growing firms to seek capital in the less-stringently regulated London market. Peter Wallison, a resident fellow at the American Enterprise Institute, quotes academic scholars as concluding that "no explanation other than over-regulation in the United States fully accounts for the loss of business to overseas markets". And he finds a gold lining in this cloud: "The erosion of US predominance in global financial services ... may finally have captured the attention of people in government who can actually do something about it."
Actually, they can't. We are witnessing the globalisation of that part of the American financial-services sector that has until now experienced less competition than America's T-shirt and trainer manufacturers. It is not only London that is draining business from New York, but Dubai and Hong Kong. As Chuck Prince, chief executive of Citigroup, told the Financial Times: "We are going to see a diffusion away from New York as a financial centre ... New York will not be unimportant, but ... people will be going to other places to raise capital."
Which is not a bad thing. If Wallison is right that over-regulation is driving business from New York, the legislators and regulators can easily make the necessary changes. Chris Cox, chairman of the Securities and Exchange Commission, is well aware of the problem, and devoted the early part of last week to digesting a staff paper describing Britain's principles-based rather than America's rules-based regulatory system. And if New York's investment bankers want to meet the new competition, they might cut their fees, which I am told are about twice those charged in London, rather than petition the government for relief.
Most important, New Yorkers must learn that attrition in its market share is inevitable in a globalised world, and to take with several pinches of salt the bleating of the financial community and politicians seeking headlines. London may be attracting more flotations than New York, but some of these companies are not exactly the crown jewels of the business world. Almost two-thirds of the companies floated on AIM (Britain's market for small companies) are trading at below their initial offer price, perhaps because the new issues in London are "the worst dreck (junk) I've ever seen", according to James Chanos, who sniffed out the problems at Enron long before the authorities did.
New Yorkers worry too much. Their city retains its unique vitality and entrepreneurial culture. If you wanna wake up in a city that doesn't sleep, go to New York.
But the biggest complaint foreigners have about America is that we are making it tough to come here. Neither New York nor London can any longer count on dominating the global financial sector. Which is a good thing: a bit of competition should make for more efficient capital markets.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.