London v New York
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For a while it was fashionable to chart the relative fortunes of London and New York as competing global financial centres as if it were a zero-sum game. The former was attracting hedge funds, oligarchs, and bankers. Meanwhile an uncharacteristic lack of confidence was visible in parts of Wall Street. Thanks to the onerous reporting requirements of Sarbanes-Oxley, it was losing foreign listings to the UK. Has the handling of the current crisis affected the balance?
Unfortunately, regulatory regimes in differing ways have proved flawed on both sides of the Atlantic. Pleased with themselves after a long period of benign conditions, the authorities were unprepared for the crunch. The light touch, principle-based regime employed by London’s Financial Services Authority was too soft. When trouble hit, an unclear division of responsibility between the FSA, the Bank of England and the government resulted in slapdash handling of the run on Northern Rock.
In the US, the regulatory failures started with the ability of individuals to buy houses without a deposit, while lying about their income. They then ran through the system all the way to a Fed that drank the Kool-Aid peddled by self-interested proponents of the “risk-free” originate-to-distribute banking model. Finally, by riding to the rescue of troubled financial institutions, it entrenched moral hazard that is only now being addressed with the failure of Lehman.
The cities will now suffer together. Fewer, less generously paid bankers mean residential and commercial property prices are set to fall in both; New York-based Lehman leased more than a million square feet of office space in London. It served the purpose of the finance industry to talk up the differences between regimes and to bemoan the risk of a loss of competitiveness of one or the other. Competition between cities is inevitable and desirable, but regulators need stop taking part in an international beauty parade that does little to promote the sustainable development of either financial centre.
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