It has frankly taken me some time to assimilate my thoughts following my week in London, not because the impressions were undefined but because they were so consistently strong. Herewith my report.
London is gaining and New York is losing.
This was brought home to me by things said and unsaid, by visceral impressions and by hard observation. Let’s start:
- I stayed in the City for the week and have never seen so many construction cranes there. (Cynics, and economists, would observe that this could be the sign of a peak, but the observation remains true.)
- As many of you know, I go for a run every morning and as I ran through the streets of the City starting around 6:00 am, I saw plenty of purposeful-looking men and women in suits rushing to and fro. I’ve also been on Wall Street more times than I can count at that hour and the streets are empty. [To be fair, the City seems to shut down earlier than the Street, and I did not compare the West End with Midtown.]
- US firms are now, at last, recognized as real players in London, but are admired only, or primarily, for their focused attention on niche practices—playing to their home-grown strengths imported from the US rather than trying to be full-service shops. They are viewed, although this may not be said out loud, as having run up the white flag in the battle to be full-service London shops before the competition started. [In this I am not expressing a view, but reporting what I saw and heard.]
- Investment banks are increasingly London-centric. Goldman Sachs, to name a name, has more people today in London than in New York. Relationships follow. Davis Polk, meet Freshfields.
- Law students and young associates and "PQE"’s increasingly seek a firm whose platform will give them global exposure. A partner at a gilt-edge NY-centric firm remarked that US law school third-year’s were increasingly considering the Magic Circle firms, and expressed a combination of mystification and disdain. Perhaps he did not entirely comprehend what he was revealing by his comments.
- A few years ago, the common wisdom was that the major UK firms desperately needed to accomplish a merger with a major "bulge bracket" US Wall Street firm in order to penetrate the New York/US market for real. Then, of course, that prospect was (rightly) viewed as a non-starter. None of:
- Cleary
- Cravath
- Davis Polk
- Debevoise
- Milbank
- Simpson-Thacher
would consider merging, at least not in our career lifetimes.
But the aggressively-expressed view now is that the UK firms "don’t need those mergers; it’s the US firms who need us. And, if they need us, the terms will be to our favor." [I take poetic license in expressing the vehemence of this view, but not in its fundamental thrust.]
Where does this leave us, we red-blooded Americans, we proud and loyal born-and-bred New Yorkers?
On red alert, is where.
A decade or a half ago, there was little doubt that the three global financial capitals were New York, London, and Hong Kong. Increasingly, it’s looking as though it’s London. New York will always be the financial capital of North America, but its role on the global stage is severely challenged. As for Hong Kong as financial capital of Asia? I’ll be there in a few weeks and give you a report, but for the long run much of the smart money is on Shanghai or even other meccas in Southeast Asia such as Singapore.
In the Americas, there’s no equivalent to the Hong Kong/Shanghai axis. Which leads to the question: If New York is essentially without rival for dominance in the Americas, what did New York do wrong on the global stage?
While New York City may have done nothing wrong, the global capital markets’ verdict on the competitive environment is clear. The damage has been done by one thing and almost one thing only: Sarbanes-Oxley. (To be sure, people mention the "Spitzer effect," even today, as well as the attack dogs of the securities class-action bar, but SOX is the really new player on the field, and the one for which Londoners give vehement thanks and New Yorkers curse sotto voce.)
I’m neither an academic nor a regulator, and won’t pretend to critique SOX from those perspectives. [For an academic perspective, I recommend The Sarbanes-Oxley Debacle: What We’ve Learned, How to Fix It, and for a regulatory view the best I can offer is the SEC’s own "spotlight" page on SOX which is self-congratulatory, unedifying, analysis-free, and stale.]
My goal here is simpler: To deliver a clear and forceful warning from my time in London. The primary unintended consequence of SOX may be to help dislodge New York from its pre-eminent role as a center of global capital formation. And if we permit its fallout to continue without repealing or knee-capping its provisions, we will have only ourselves to blame. Among the critiques I heard leveled at SOX were:
- It encourages highly risk-averse management, the antithesis of American entrepreneurialism and innovation.
- Ironically enough—along with Regulation FD—it discourages corporate disclosure and communication with analysts and other commentators and observers since the statement not made cannot later be labeled misleading.
- The requirements for independent directors operate to disqualify anyone with actual experience in the industry and, perhaps, judgment, perspective, or insight.
- Worst of all, of course, the potential criminalization of accounting judgments—touching not just the corporation but senior executives—operates, as one managing partner put it to me, to make every publicly US-listed company long for the day when all they had to worry about were the quarterly earnings expectations of Wall Street: "Today, it’s not the stock analysts you’ve got potentially looking over your shoulder, it’s the US Attorney."
- Finally, there is universal consensus that had SOX been in place before the parade of the Enron, Tyco, and Worldcom horribles, they still would have happened. Why? Because one cannot legislate common sense or integrity. More than one person pointedly observed that fraud and misrepresentation have always been illegal and we’ve always known quite well how to deal with them. Piling SOX on top had the same practical effect as "making it illegal to break the law" (that would be zero).
Can I wrong about this? Without doubt. This is one of the occasions when I am more interested in reporting my cumulative impressions than I am in attempting to predict a trend with certitude. And I invite those of you with different perspectives to take issue with my report.
The good news is that London has never looked, to my eye, more vibrant, energetic, polyglot, and self-assured. If anything, its worst problem now is that all the hot properties are over-suscribed: From real estate to restaurants to hotel rooms, the city needs its own massive "Congestion Charge" to tamp down demand. Of course, for those of us who earn our income in $$, the ££ is already exacting something much like that charge.
If you plan to move there—and many of you may find yourselves doing just that—just make sure your unit of income will be the ££. You are permitted, however, to say a wistful goodbye to the $$ on your way over.
