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Discussion Starter · #1 ·
Towering London
Bulging briefcases of toilers in 'the City' are matched by bulging wallets in the best days since the dot-com boom. But could the bubble burst?

From Monday's Globe and Mail
LONDON — You don't have to be an economist to figure out that London is in the clutches of a remarkable financial services boom. Instead, just take a stroll down Old Brompton Road in the affluent borough of South Kensington, and have a few words with Tim Kearns.

The general manager of H.R. Owen Sports Cars is something of a bellwether for the fortunes of the financial district here: About 60 per cent of the customers who visit his dealership to pick out a new Ferrari or Maserati work in "the City," a square-mile cluster of investment banks and brokerage firms that represent London's answer to Wall Street.

When business is good for him, it's typically because business is good for bankers. And lately, business has been blistering. In 2005, sales at his showroom were better than they have been for at least the past eight years, and demand is reaching unprecedented levels.

"Demand for our products -- Ferrari and Maserati -- is off the scale, really," Mr. Kearns said. "Customers appear more willing to spend than they have in quite a few years."

That's probably because they can spend more. A lot more. The City is flourishing.

It's enjoying the best time since the dot-com boom, adding to a growing reputation as the world's most international financial centre. Headhunters are scrambling to fill job vacancies, domestic stock markets are filling record trading orders, bonuses have risen almost 20 per cent on average, and bankers are racking up champagne tabs of nearly $100,000 at exclusive nightclubs -- signs of a city as flush with cash as with renewed optimism.

"It's been an incredible transformation," said Euan Harkness, vice-chairman of Barclays Capital, and a 30-year veteran of the business. "It's the one sort of jewel in the economy as far as the U.K. is concerned."

A series of factors, some the result of planning, others the residue of luck or circumstance, have aligned themselves decisively in London's favour. The value of mergers and acquisitions here accelerated by more than 30 per cent last year, building on a 64-per-cent increase in 2004. The pace was driven largely by the commodities market, a natural sweet spot for the city, which has strong historical ties to the mining and energy industries.

Regulation has also been a key driver in attracting capital, people, and foreign companies. British authorities have steered clear of the strictly prescriptive rule-making enshrined in the U.S. Sarbanes-Oxley Act, opting instead for a looser, more principles-based approach. The result: an explosion of Britain's Alternative Investment Market (AIM), a junior stock exchange catering to smaller companies.

Then there is the proliferation of hedge funds and structured products experts, which have made the City a fertile ground for developing new financial products.

"Financial services are absolutely booming in London," said Douglas McMillan, who heads the Centre for Economic and Business Research, an influential think tank that tracks the industry. "I think most people in London would say London is well ahead of New York as an international centre."

Advantageous labour laws, tax breaks for business and investors, and a government policy that encouraged a level playing field between domestic and foreign financial players have all helped to lay the foundation for the City's recent revival. Geography hasn't hurt, either.

Wedged as it is between the Asian and North American markets, London has access to both in the same day, positioning it favourably to capitalize on the emerging potential of China and India. Not coincidentally, the Nasdaq Stock Market recently attempted to buy its way into Britain, with the attempted purchase of the London Stock Exchange. The U.S. exchange withdrew its offer, joining other rebuffed suitors, such as Germany's Deutsche Boerse and Australia's Macquarie Bank Ltd. but then re-emerged as potential acquirer last week after buying a 15-per-cent stake in the publicly traded LSE. Takeover speculation has driven the LSE's stock price up 99 per cent so far in 2006, and the exchange has delivered investors a heady one-year total return of 171 per cent.

The febrile jockeying of these suitors underscores London's cosmopolitan appeal, and its value as a strategic conduit for other exchanges as business becomes increasingly globalized. With foreign companies pouring in to expand their investor base or to bypass expensive U.S. regulation, there has been a corresponding migration of foreign service firms, brokers, lawyers and accountants from Europe and beyond.

Even with this financial immigration to London, recruiters are still having a difficult time keeping up with the demand for qualified people, particularly in the M&A field. Last year, the number of financial-related jobs in London rose to a record 327,600, up from the previous high of 324,200 set during the Internet boom. According to CEBR, Mr. McMillan's organization, that figure could climb to 341,600 in 2007.

"It feels as busy as it was probably in 1999, when you didn't have enough people to go around," said Isabelle Martin Hotimsky, a financial recruitment specialist with Korn/Ferry International in London. "It's hard to replace an experienced person. It's very tough to find certain categories of people."

This has meant a bidding war for talent, which has helped increase compensation levels at the senior banker level. CEBR estimates that City bonuses rose more than 17 per cent last year to £7.9-billion ($15.9-billion), and is predicting another couple of years of double-digit increases.

Not surprisingly, the extra cash in the system has created an upward spike in the high-end housing market, and led to some visible incidences of profligacy -- not just with the Ferraris that are squealing off the lots. Last year, a banker ran up a £41,000 bar tab after ordering 70 bottles of champagne and spraying them around the room (about £10,000 went to the clean-up bill). Not long after, a hedge fund manager celebrated his bonus with a £36,000 bubbly spree, capped by a £3,000 tip to one of his waitresses.

This sort of dissolute behaviour inevitably raises the question of whether the bubble is about to burst. Certainly, there are potential dangers lurking ahead, not the least of which is the country's relatively lax regulation. Strong markets can often disguise problems, and many question whether the unusual regulatory structure of the junior AIM market, in which much of the due diligence is outsourced to the brokers that help companies list their shares, could produce accidents that threaten investor confidence.

London's multicultural work base could also be a double-edged sword, according to some, since many of the recent arrivals have fewer ties to Britain, and could be incited to move more easily.

Then there is the ever-present threat of a sudden rise in energy prices or a cooling off of the commodities markets. CEBR is predicting the financial sector's output will increase another 6 per cent this year, but will begin to tail off in 2008 as markets slow and M&A activity ebbs.

The British government can't do much about where the markets move, but it's trying to take a more active role in shaping and promoting the City. This shouldn't come as a surprise, given how much the financial sector has contributed to the country's economy. In his budget last month, Chancellor of the Exchequer Gordon Brown said that tax revenue from the financial sector -- both from the companies themselves, and individuals -- helped to offset weaker contributions from other sectors. More than half a million people in Britain, many in the City, now make more than £100,000 a year, and account for about one-quarter of the country's income tax base.

Mr. Brown recently announced the formation of a task force, drawn from both the public and private spheres, to build on the financial sector's recent success and begin promulgating its strengths as a destination for international business. The group will focus mainly on London's global appeal, its regulatory scheme, and the depth of its talent and markets.

Booms like this are cyclical by their very nature, of course, so the challenge facing London is trying to build on its current advantages in order to weather the inevitable downturn.

"What makes a successful financial centre is regulation, tax structure, and technology," said Mr. Harkness of Barclays. "The balance is massively important."

London's broil: What's behind the boom

Commodity prices are soaring.

Mergers and acquisitions rose by 30 per cent in 2005.

Companies weary of onerous U.S. regulations are listing in London.

Hedge funds and other financial products are rising in popularity.

Positioned between Asia and North America, London has access to global major markets on the same day.

"It's been an incredible transformation," said Euan Harkness, vice-chairman of Barclays Capital.

"Financial services are absolutely booming in London," said Douglas McMillan, chief executive officer of the Centre for Economic and Business Research.


Number of financial-related jobs

in London, up from the previous

high of 324,200 set during the

Internet boom.


Number of financial-related jobs

estimated to exist in 2007,

according to a forecast by CEBR.


Number of people in London who earn more than £100,000 a year.

8,354 Posts
Discussion Starter · #2 ·
London's New Confidence
The city's financial center has grown both geographically and in the estimation of investors around the world, defying dire predictions.
By Martin Dickson, Financial Times
April 17, 2006

There is a certain swagger about the City of London these days — a self-confidence born of success. It has strengthened its position as Europe's leading financial center and is a magnet for capital and talent from around the world.

The swagger of this "New City" is manifest in the changing skyline — be it the bulbous effrontery of the Swiss Re building, known colloquially as the Gherkin, or the cluster of big banking towers at Canary Wharf to the east.

It is reflected in the way the City of London has grown geographically, with private-equity houses, hedge funds and advisory boutiques gravitating to London's West End and large investment and integrated banks going east to the capital's revitalized Docklands.

And the swagger is visible in the people. Take Clara Furse, chief executive of the London Stock Exchange. Appointed five years ago to head a fractious organization with a history of bungled modernization initiatives, she got off to a hesitant start. But with equities trading booming, and having seen off three potential bids in the last year, Furse and the exchange now radiate self-confidence.

The latest bid, from Nasdaq, serves to underline the value of the institution.

So what makes the New City successful, who makes it tick, and where, for better or worse, is it heading?

For a start, there is a consciousness that London can hardly afford to be smug or complacent. Gordon Brown, Britain's chancellor of the exchequer, appeared to recognize this last month when he announced an initiative to bolster its position as a financial center.

Competition never ends — and the City of London still bears scars from the loss of a key European government bond futures contract to Germany in the late 1990s. London may also be close to the peak of a credit cycle, awash with cheap capital. Who knows what wreckage the ebbing tide will reveal?

All that said, London's current bullishness stands in stark contrast to the mood before the millennium. At that time there were plenty of pundits warning that the introduction of the euro could help Paris and Frankfurt — ambitious for their financial services sectors — capture substantial business from London.

In fact, the trend has been in the other direction and the city also has closed the gap with Wall Street. "London is no longer the second city," says James Cayne, chief executive of U.S. investment bank Bear, Stearns & Co. "Right now it is as fast as New York."

London, of course, has long been Europe's leading financial center. But its market share in many of the disciplines where it has traditionally led the region has been on the rise or stable over the last five years, and it has captured a large share of some of the most important new opportunities.

It now accounts for 20% of cross-border bank lending, up from 16% in 1992, and its share of foreign exchange turnover has risen from 27% to 31% over the same period. It accounts for 70% of the secondary market in international bonds. Half of European investment banking activity is thought to be conducted through London.

Its share of derivatives traded on exchanges may have fallen over the last decade, but London has reinforced its position as the leading center for custom over-the-counter products. It is thought to account for about 45% of the fast-growing market in credit derivatives.

London has long been the leading center for international fund management, though the industry's traditional focus on relative rather than absolute returns and its high charges for retail investors have smacked of complacency and created scope for a new breed of absolute-return investors.

Yet here, too, London dominates Europe: More than three-quarters of the region's hedge fund assets are managed out of London, as are nearly 50% of private-equity assets.

In quoted equities, London's has become Europe's leading exchange for emerging-market listings, and its junior Aim market has become the region's most successful source of capital for small companies.

More generally, London's pull means that an increasing number of Continental financial services operations are choosing to base themselves in the city. They range in size from Deutsche Bank, Germany's largest private-sector bank, which is now run largely from London, to the likes of a private wealth management company with predominantly German clients who enjoy the opportunity to visit London.

Britain's long tradition of laissez-faire capitalism and openness to competition have created an environment in which financial creativity can flourish. In the 20 years since London's financial markets were deregulated in the so-called Big Bang, the makeup and ownership of the city's investment banks and brokerage houses have changed beyond recognition.

The first decade was characterized by the growing dominance of large, integrated American houses. The last few years have seen the emergence of a more mixed ecology. British-owned brokerages have sprung up to serve small and mid-size companies that are off the radar of the biggest banks.

Banking advisory boutiques are being set up to meet clients' demands for a more personal service, free of potential conflicts of interest.

Regulation has also been crucial to London's success, be it self-regulation — as with the Takeover Panel, probably the world's best referee of bids — or state-imposed rules. Over the last few years the City of London has undergone a change of regulatory framework with the creation of the Financial Services Authority — a single, statutory institution replacing 10 self-regulatory bodies.

London is the only big financial center to have a single regulator with such concentrated powers — and a heavy-handed Financial Services Authority could have damaged London's creativity and competitiveness. Instead, despite grumbling about its bureaucracy, the authority is regarded as having struck a reasonable balance and to be growing better at doing so. This matters in a world where strong but measured regulation, offering investor protection, is a source of competitive strength rather than weakness.

These fundamental factors — good regulation and a pro-competition orientation — have created the basis for a concentration of market liquidity and financial expertise. And once a center captures these attributes, they tend to be self-reinforcing — in the absence of political interference — and create a strong client base for the sophisticated international financial consultancy sector that is another strength.

London has certainly benefited from others' actions. For example, the Sarbanes-Oxley legislation in the U.S. has created a governance framework that discourages foreign companies from raising capital in the U.S.

An aggressive response to the 9/11 terrorist attacks, including the recent row over a Dubai company acquiring U.S. container terminals, may have made the U.S. less attractive for Middle Eastern funds. And the collapse of Germany's Neuer Markt eliminated a potential competitor to Aim.

London also has softer attractions. It is an agreeable place to live — despite high property prices and poor transport — and its increasingly cosmopolitan atmosphere is matched only by New York. Its tax regime has also been benign to foreign nationals.

Employment regulations have also helped, allowing talent to be imported. Indeed, one of the most remarkable changes has been the broadening of the talent pool.

Two decades ago investment bankers and fund managers would work surrounded by people like themselves — notably Oxford or Cambridge arts graduates — but now they are just as likely to be seated next to a mathematics wizard from Azerbaijan. This creates another virtuous circle — the better the international talent in the city, the more it increases London's competitive advantage and the greater the advantage, the more it attracts fresh talent.

Technology has also played a vital role. Most obviously, new computer systems have allowed London's equity and derivatives exchanges to remain competitive. Technology has also democratized markets. Relatively cheap access to data means you no longer have to work for a large institution to make your mark. Set up a hedge fund and investment banks will provide you with leverage, stock lending, trade processing and investment ideas.
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