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They're Going Downtown

London won't replace New York as the world's financial center any time soon.

12:00 AM, Oct 16, 2007 • By IRWIN M. STELZER
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"NO WAY, NO HOW . . . Aw, come on!" That was Rudi Giuliani's reaction when it was suggested during the recent presidential debate that London might replace New York as the financial capital of the world. And he didn't even know at the time that the Labour government of Gordon Brown was about to take dead aim at its own foot and make a major assault on London's role as a leading financial centre. So Chuck Schumer, Hank Paulson, Mike Bloomberg, and others who worry that Wall Street is about to become of historical interest only can relax: New York's financial lead ain't goin' anywhere.


This is not to deny that London has its attractions to the world's financial players. It lives in a great time zone from which to do business around the world (but New Yorkers are better at getting up early and working late); has good theatres (featuring mostly musicals that ran in New York decades ago); and uses the universal language of business (a variant of the one spoken on Wall Street).


And for a time it seemed that London also had a regulatory system more attractive to investors; a generous tax regime that left income earned outside the UK untouched by the British tax collector and favored small businesses looking eventually to tap the public markets for capital; and an appealing quality of life. Times change.


Pictures of nervous depositors lined up to get their money out of one of Britain's leading savings institutions made the front pages of newspapers around the world--a scene unknown in New York since the days of Herbert Hoover. Worse still, the UK central bank, and some of its regulatory authorities, the very ones New York Mayor Mike Bloomberg recently trotted over to consult and then emulate, didn't know what to do.


It seems that the British deposit-insurance system is inferior to ours: the level of protection is less, and it takes six months to get your money, which makes it tough on old folks living on their savings. So the Brits are now considering adopting the American insurance system. Score one for the U.S. financial regulatory system, and New York over London.


It also turns out that the responsibility for the safety of Britain's banks is divided among three agencies, which, in effect, means no one is in charge. Not exactly the regulatory system Bloomberg should be studying. And not one investors are likely to find as congenial as the U.S. system, especially now that the Sarbanes-Oxley act has had a few tweaks to ease the administrative burden it places on some firms. Score two for New York.


As for the tax regime, it is a lot less favorable than it was
when the moaning about the decline of New York and the rise of London began. Britain's Labour government, desperate for cash to fund its ever-expanding welfare system, has decided to milk the financial sector. Americans like me, who are technically classified as resident in Britain, but consider the United States their main home and eventual permanent destination, will not only have to pay income taxes on what they earn, and high (17.5 percent) sales taxes on what they spend in the UK, but an annual fee of ₤30,000 (about $60,000) for permission to work in London. Not much for an investment banker, perhaps, but not peanuts for most others. Score three for Gotham.


More bad news for the City, as London's financial district is known: private equity operators will soon pay taxes at the rate of 18 percent, rather than 10 percent, on profits from their deals. And so will entrepreneurs, who have built their businesses in the hope of cashing out at the 10 percent rate that then-chancellor Gordon Brown introduced to encourage job-creating entrepreneurship. Some of these moves distribute the tax burden more fairly, but at the same time they do make London a less attractive place in which to locate a business.


Then there is the small problem of the $2 pound, which makes London a much more expensive city in which to do business than New York. Some businesses can afford it. A hedge fund recently rented about 5,000 square feet of space in toney Mayfair at a reported price of almost $300 per square foot. That's about five times the rate on Wall Street. Other businesses have to think hard before running up the kind of costs now common in London, and imposing those costs on their globe-trotting executives. New York's Park and Fifth Avenues are now low-rent districts compared to comparable parts of London.


Then there is the quality of life. In pre-Giuliani New York, Wall Streeters tried to figure out how to get transferred to their firms' London offices. No longer. New York is now one of the safest cities in the world, and London one of the most dangerous.