COLUMNISTS I had the privilege last week of sitting close to Hank Paulson, the US Treasury secretary as he told Wall Street’s great and good how he intended to restore New York to its former dominance.
Mr Paulson started his speech to a lunch of the Economic Club of New York, as is customary, with a joke: “It’s good to be in New York City, the financial capital of the world.”
Ho-ho. Very dry. As his nervous audience knew, New York is not the world’s financial capital any more than the US baseball championship deserves the title of World Series because the Toronto Blue Jays have a chance of qualifying. One of the world’s leading financial centres, certainly, but not the only one.
Were Wall Street confident of its pre-eminence, Mr Paulson would not have been at the podium discussing the irritations of the Sarbanes-Oxley Act and corporate law suits. But the rush of companies to the Alternative Investment Market in London and the fact that London and Hong Kong now host many of the world’s initial public offerings has dampened spirits.
As Mr Paulson spoke, big-wigs such as Tim Geithner, president of the New York Federal Reserve, and John Thain, chief executive of the New York Stock Exchange, were arrayed alongside him on a dais. From below, they resembled the disciples gazing at their Saviour in Leonardo da Vinci’s “The Last Supper”.
Wall Street has one of its own as Treasury secretary in Mr Paulson, the former chairman and chief executive of Goldman Sachs. After the eccentric Paul O’Neill and the ineffectual John Snow, his clarity and authority is a relief. He grasps the issues and their importance to New York and the US. He also has a sensible approach to making things better.
But I do not think Mr Paulson will be Wall Street’s saviour. This not simply because aiding millionaires and billionaires is now a low priority in Washington. Nor is it because his suggestions, such as culling regulators and switching from rules-based to principles-based accounting, are hard to implement, although they are.
Even if he could achieve them all, there are two reasons why the old order would not return.
First, the biggest foreign companies used to come to Wall Street because that was where the money was. They could tap into the US institutional and retail savings pool, and gain the attention of many New York-based hedge funds, only by obtaining a listing on the NYSE or Nasdaq.
This is no longer true. More money is managed in other financial centres, particularly London. In a report for the London Stock Exchange, the consultancy Oxera estimated that London had $7,600bn in equity assets under management last year, compared with $8,200bn in the four top US centres combined, including $3,100bn in New York.
Meanwhile, US money has flowed to companies abroad, rather than the other way around. The weaker dollar and the expansion in investment opportunities abroad led to Americans holding $3,100bn in foreign equities last year, compared with $700bn in 1995. Industrial & Commercial Bank of China did not need to list in New York to raise $19bn in its recent IPO; Hong Kong had the capacity.
Second, the expansion of US investment banks over the past two decades has exported Wall Street know-how to the world. I remember the awe and suspicion with which US techniques such as bookbuilding were greeted in the City of London in the mid-1990s. Even the term IPO was alien. Yet London is now at least equal to New York in innovation, particularly in derivatives.
London has been able to pick the best aspects of US practice and discard others. Underwriting fees for international IPOs remain much lower in London: they average 3.5 per cent on the LSE, compared with 7 per cent on Nasdaq and 5.6 per cent on the NYSE, according to Oxera.
These changes have amounted to a financial Marshall Plan, bringing US capital and expertise to the rest of the world. The US has been inept at exporting democracy, but it has done a fine job of spreading capitalism. “Sarbanes-Oxley has simply amplified a much broader trend,” says Michael Tory, a senior investment banker at Lehman Brothers in London.
This has allowed companies in Asia to follow their inclination and list in Hong Kong, rather than having to trek across the world. Those from eastern Europe, Russia and the former Soviet Union, such as Kazakhmys, the Kazakh copper mining group, have been drawn to London, while big continental European companies have listed in Paris and Frankfurt.
The US government and regulators can do things to make Wall Street a more welcoming place for foreign companies. Among them are ameliorating the worst aspects of how Sarbanes-Oxley was implemented, and simplifying oversight. The NYSE and Nasdaq might also hold investment banks to account for charging far more at home than abroad.
None of this will alter the fact that the world is rebalancing. Last year is often cited as a particularly bad one for Wall Street: only one of the top 25 IPOs by value took place in New York. Yet Ernst & Young’s global map of total IPO activity was not obviously distorted: 27 per cent by value took place in the US, 42 per cent in Europe, the Middle East and Africa, and 31 per cent in Asia.
Mr Paulson has the right idea about how to reform US financial markets and regulation, hard though that will be. Wall Street must do something tougher: become accustomed to its diminished place in the world.
