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Gillian Tett, capital markets editor, interviews Thomas Russo, vice-chairman, Lehman Brothers at Davos on January 25 2007

Gillian Tett: Obviously one of the hot topics at Davos this week is the issue of financial market regulation, and competition between financial centres, and I had wondered if you could tell us how you see the competition developing between New York and other centres like London at the moment?

Thomas Russo: Well, the competition is certainly fierce, if you look at just some of the literature from for example London Stock Exchange they make much of the fact of the difference in the regulation and the litigation in the United States, and it’s been quite effective, it’s not just London it’s other centres including Hong Kong, and what you see is a migration of business, a pretty serious migration to other centres. For a variety of reasons, but one of them certainly is the litigation in the United States, and the feeling that it went too far.

GT: Do you think that trend can be reversed?

TR: It would be very difficult to really reverse it, it is possible to go and put it in a position where you’re continually losing more, it would be very difficult to bring it back, because once business moves it’s sometimes very hard to get back, if where it moves is comfortable.

GT: Right, do you think that US politicians understand the seriousness of the threat?

TR: If you would have asked me that question six months ago, I would have said no, but there are two recent reports, one was a capital markets report done by about 22 people getting together, looking at this issue and that came out November 30th, and most recently there was a report done by McKinsey that was sponsored by Senator Schumer, a Democrat, and by Mayor Bloomberg, who is a Republican Independent, more independent I guess, and they both came to the same conclusion, and in the past it was looked upon as perhaps belly-aching by an industry not wanting to get sued and all the class actions, all the litigations. Now it’s being looked at in a much more serious way in terms of jobs, when you have the financial services industry about 8 per cent of the GDP, 5 per cent of the jobs, then it just takes a very much more of an economic, and to some extent then populace, point of view.

GT: Right

TR: And so that gets politicians, and it should be because the financial services industry is a marquee industry for the United States and to take yet another industry where it is at the top and to see it erode is just not a good thing for the country.

GT: Right, obviously it’s not a good thing for the country, what does it actually though for US banks like Lehman Brothers?

TR: That’s the interesting question, there’s the dichotomy because for a country’s point of view it’s loss of jobs, it’s a loss of reputation, stature and a lot of things. From a global corporate point of view, it’s slightly different, because where you have major offices as we do in London and Hong Kong, in Tokyo, in all the major, Singapore, in all the major centres, it does a lot of things, but it gives you options so that if you’re looking at where to do business and you know you could do it in a place where the regulatory structure makes sense and there’s a lot of integrity there, and yet you’re not going to get sued for everything that, anything you do, and regulators tend to talk with you and solve problems, and you’re not in the newspapers all the time, and as I said the integrity of the marketplace is there, and the liquidity is there, those options make it somewhat more comfortable in certain circumstances to do business elsewhere.

GT: Right, and just what makes London, say, so attractive right now?

TR: Well, London has got a lot going for it, there is a lot of liquidity there, the markets have really grown and evolved, and the FSA is really, has really done a great job of regulating without over-regulating. They use the enforcement arm, but only where it’s absolutely necessary, it’s a last resort, it’s not the first thing that comes to mind. You don’t have the kinds of class-actions there at all, it just doesn’t exist, you have a losers-pay kind of a system, which makes litigation a serious matter, and yet the market, the integrity of the market, the lack of real major problems, you’re always going to have problems in any market, seems to be there, so the balance that they’ve managed to achieve is remarkable, and I think that’s why a lot of Hedge Funds are there. Just a few years ago New York had 28 of the top 50 Hedge Funds, now it has 18, London had only three, now it has 12, it makes more sense, and I think that’s going to lead to more jobs, and it’s just a good place.

GT: Why is there such a large representation from Wall Street in Davos?

TR: Well, I’ve been here now, I guess this is my tenth year here, and this is I think the most I’ve seen, I don’t know why many people are here, but there’s a lot of talk, more so than I’ve ever heard before, about the influence of private equity, and private equity is a big topic, and it goes to that earlier topic we were talking about, one of the reasons people like going private is to get out of a lot of these problems, and it used to be that the exit strategy was to go public, now often the exit strategy was to go to another private equity firm, and I think they’re just much more of a serious player in the corporate world, and there’s no corporation, no matter how big, because of the liquidity that they have, that isn’t, you know, that someone isn’t looking at somewhere.

GT: Where US banks, like Lehman Brothers, are getting more of the revenues from outside the US, do you think there’s a need for the senior management of the US banks to engage more thoroughly with the world beyond Manhattan?

TR: The world beyond Manhattan, yes, I think so, I think that may be a reason too why people are here. The US markets, I guess I should make this point; the US markets have been and probably will always be very strong and very important. It’s the relative growth in the US markets versus the rest of the world. The rest of the world is doing a lot of good things, and creating a lot of confidence, and therefore is getting a lot of business, and one of the barometers of that are the global IPOs, back in 2002 50% of the global IPOs were in the United States, and in 2005 there was only 5%, so I just think we’re going to go where the growth is, but we’re not going to lose sight of the United States, it’s pretty important.


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