Wall Street Woes

Saving N.Y.C.'s Leadership Role

YESTERDAY, consulting firm McKinsey unveiled a report detailing how, and why, New York is losing its position at the top of the global-finance world.

Mayor Bloomberg and Sen. Charles Schumer (who jointly commissioned the report) gave the sobering news the attention it deserves, and Gov. Spitzer joined in. "If New York goes from being the financial capital of the world to becoming only a regional market . . . every aspect of New York life will suffer, not just financial services," Schumer said, alluding to how Wall Street drives Gotham's economy.

McKinsey found trouble across New York's entire financials-services spectrum, from equity to debt to derivatives.

Equities: Global firms no longer line up to list stocks on New York exchanges. "Over the first 10 months of 2006, U.S. exchanges attracted barely one-third of the share of IPOs [initial public stock offerings] measured by market value that they captured back in 2001, while European exchanges increased market share by 30 percent and Asian exchanges doubled their share."

And it's not just international companies shying away from New York: Small U.S. firms "increasingly favor" London markets.

Derivatives: America indisputably has fallen behind in this high-growth global markets. (Derivatives are financial instruments whose values come from other financial instruments or underlying assets; foreign-exchange derivatives, for example, are based on the underlying value of foreign currencies.) London boasts 49 percent of the global foreign-exchange derivatives market and 34 percent of the interest-rate derivatives market - versus just 16 percent and 24 percent for America.

McKinsey quotes one exec as saying that "the U.S. is running the risk of being marginalized" in derivatives.

Debt: New York retains a clear lead in arranging, packaging and selling debt - for now. The report notes, "London is rapidly emerging as an effective alternative," in part because the city has adapted innovative "American" terms and conditions for Asian and European issuers.

New York's innovators are losing ground in part because of a big handicap: crippling U.S. regulatory and legal environments, as well as an unwelcoming environment for high-skilled immigrant workers.

Companies are reluctant to list on U.S. stock exchanges in part because doing so now requires complying with the 5-year-old Sarbanes-Oxley Act (SOx). SOx forces executives to jump through regulatory hoops to ensure that their firms' financial statements and internal "controls" are in order. Executives (and their accountants and investors) who think they're already doing a good job of complying with (less stringent) internationally accepted accounting standards are unlikely to want to spend the hefty sums needed to comply with SOx.

Even where SOx doesn't directly apply, companies still feel the burden of American regulations. For example, people working with derivatives "feel less encumbered overseas by the threat of regulation and so are more likely to think outside of the box," one U.S.-based business leader told McKinsey's researchers.

It's easy to see why. U.S. firms don't just have to deal with the Securities & Exchange Commission and sundry other federal regulators; they've also got state attorneys-general (think Gov. Spitzer in his previous job) to worry about. In London, a single regulatory agency has primary jurisdiction over securities firms. And that authority encourages compliance with clear principles, rather than with thousands of pages of fine print.

Finally, there's global talent. New York is still tops in fostering an environment of innovation, according to business leaders surveyed by McKinsey. But to stay there, it must continue to attract the world's best students and workers.

But, thanks to a federal cap on visas for high-skilled workers, it's been doing the opposite. European Union citizens can travel and work relatively freely within the EU, so it's a small matter for a London-based firm to attract a top trader or banker from Paris; it's a headache to put the same person in a New York job.

Twenty years ago, international execs would've had to put up with all these problems to access the American cash and expertise they needed. Today, financial markets in London, continental Europe and parts of Asia and the Middle East increasingly offer "American"-style expertise and deep pools of international investors. Executives simply don't have to bother with New York.

McKinsey offers some solid suggestions. Most important, New York should lobby legislators and agencies in Washington to fix what's obviously broken in terms of runaway regulation and litigation, so that New York doesn't lose its reputation as a cauldron of financial-services innovation. (Chicago, as a derivatives hub, has a stake in working with New York here.)

Another McKinsey suggestion isn't so great: Having New York create a public-private "joint venture" with a "highly visible leader" from the business world to focus "on financial-services competitiveness." This blue-ribbon panel would work with top financial-services firms to encourage them to create more jobs here. It would also study things like creating a "special international financial-services zone" here via tax and regulatory breaks.

The answer here isn't to offer some financial firms and locations special treatment. Officials have to work to ensure that all New York firms can compete on fair terms against the rest of the world.

If New York prods Congress and federal regulators into doing their jobs, companies will soon figure out that the climate for financial-services businesses here has improved - just as they figured out that Sarbanes-Oxley was bad news long before the politicians did.

This piece originally appeared in New York Post

This piece originally appeared in New York Post