(Fortune Magazine) -- To understand why London thinks it's beating New York in a race to become the financial capital of the world, walk across the Millennium Bridge toward St. Paul's Cathedral and count the number of cranes that clutter the skyline. The City, London's financial district, is in the midst of its biggest redevelopment boom since the Blitz, one result of the $100 billion in foreign investment pouring into the British capital annually.
The money is coming from the Middle East, Russia, India, China, and the U.S., and it's padding wallets, filling restaurants, pushing real estate prices through the roof, and fueling a feeling of self-confidence that spreads from coffee shops to Mansion House.
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| The view from the World Financial Center. Lower Manhattan, devastated on 9/11, is just beginning to rebuild. |
That's the ornate official residence of the Lord Mayor of the City and the scene of an annual black-tie dinner for bankers. This year's banquet in June seemed more like an Olympics celebration (yes, London beat New York in landing the 2012 games) as Gordon Brown, just days from becoming Prime Minister, rose to declare victory.
"Today over 40% of the world's foreign equities are traded here, more than New York," he said. "Over 30% of the world's currency exchanges take place here, more than New York and Tokyo combined. And while New York and Tokyo are reliant mainly on their large American and Asian domestic markets, 80% of our business is international." This is an era for London, Brown boasted, "that history will record as the beginning of a new Golden Age."
New York is hardly in a Dark Age. But by comparison it seems stricken with self-doubt. Mayor Michael Bloomberg and Senator Charles Schumer commissioned a McKinsey report earlier this year that highlighted weaknesses in the city's position as a financial center, including too much litigation and heavy-handed regulation, and warned that New York will lose its global preeminence in a decade if they are not addressed. Governor Eliot Spitzer has convened a blue-ribbon commission to figure out solutions. In Washington, Treasury Secretary Henry Paulson is calling for significant changes aimed at strengthening the competitiveness of U.S. capital markets, and Christopher Cox, chairman of the Securities and Exchange Commission, is talking bluntly about the need for the SEC to rethink the way it works.
There's no shortage of evidence to underpin the contrasting moods in the two cities. Statistics about the amount of funds raised by foreign firms are especially jarring: In 2001, 12 of the top 20 global IPOs were listed in the U.S., according to Dealogic; last year, just two of them were. An upstart over-the-counter market in London called AIM raised as much in IPOs last year as Nasdaq. MasterCard is just the latest organization to publish a study, in June, which ranked London ahead of New York as the world's top center for commerce. Even Hollywood is getting in on the act: 20th Century Fox is reportedly basing the sequel to Wall Street, the hit 1987 movie in which Michael Douglas declared "Greed is good," in London.
How come? The view from the British capital is that while New York has been riding the now faltering U.S. economy, London is riding an even bigger tiger, the booming global economy. While the U.S. is weighed down by the 2002 Sarbanes-Oxley Act and other post-Enron financial regulation - so the argument goes, although it's far from clear that the controversial act itself is the main problem - London has put in place a new, lighter, and altogether more flexible regulatory approach that makes it easy to do business, regardless of nationality, currency, or accounting system. While the U.S. built walls after 9/11, London is wide open and welcoming, notwithstanding its own concerns about terrorism.
The U.S. has class-action lawsuits, frivolous or otherwise, that act as a deterrent. Britain has a fiscal system that attracts well-heeled foreigners. (Residents not officially domiciled in Britain are taxed only on their British income, not their worldwide earnings.) "It's going to be very difficult for New York to get back into the game," says John Ross, financial advisor to London mayor Ken Livingstone. Only half-joking, he adds, "Someone said the other day that all New York needs is a total change of the U.S. political system and a total change of the U.S. legal system."
