The document discusses the debate around whether New York will remain the dominant global financial center as other cities like London, Hong Kong, and Shanghai rise. While some see signs of New York's decline, the document argues that historical trends show economic power fluctuates and no single city will likely eclipse New York. It also notes that the growth of markets in Europe and Asia is driven more by policies encouraging local listings than issues with US regulations.

1. Opinion
How the mighty have fallen.
The global market tumble
has given new voice to a
chorus suggesting New York
has slipped from its perch
as the world’s biggest
I
financial center. London, n the 1980s when
the ascendancy of
Hong Kong and Shanghai Japan seemed as-
sured, an interviewer
all aspire to global financial asked Richard Nixon
about the loss of U.S.
market preeminence. economic supremacy.
He noted that in the
Yet, if history repeats itself, 1930s Americans had
underestimated the
there are still plenty of Japanese, only to exag-
gerate their compara-
reasons to be optimistic tive strength after Pearl
Competitiveness
Harbor. After the war,
about U.S. prospects, argue victorious Americans
again discounted Japan
Jason Glass and Ed De Sear until the 1980s when Wrong on Watergate, right on the relative strength of states
Associated Press
fears arose that the Japanese were surpassing the U.S. economically while literally buying
of McKee Nelson. the U.S. in the form of trophy real estate from New York to Hawaii. Nixon’s cool appraisal
of the prior 50 years of U.S.-Japanese competition was that neither power was ever as
invincible as assumed, nor as weak as feared. Subsequent history proved Nixon correct.
Recent events in the U.S. bring new urgency to questions regarding its economic
competitiveness. The collapse of American retail and investment banks caught market
U.S.
participants and public officials largely unprepared, and stoked criticism of the U.S. Peer
Steinbrück, the German finance minister, who predicted “the United States will lose its
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2. superpower status in the world financial system” is only the three generations, is that capitalism will lift the greatest per-
most recent doomsayer of the past year. Certainly, the U.S. centage of the global population out of poverty, while increasing
faces daunting economic challenges, and both the accounting prosperity will foster global stability.
scandals of the recent past and the current credit crisis have That policy experienced some marked successes. Among
exposed flaws in its capital markets, raising genuine ques- the most profound achievement has been the cultivation of
tions about the ability of capitalist societies in Eu-
Americans to remain atop rope and Asia. A natural
the international financial consequence of this is the
order. growth of robust capital
Until recently, con- markets that serve the
ventional wisdom sug- needs of local investors
gested the U.S. was too and companies. Although
heavily regulated. The this has led to a shift from
Sarbanes-Oxley Act of U.S. capital markets to
2002 was, in particular, foreign stock exchanges
criticized by many com- and bond markets, critics
mentators for driving for- err in attributing these
eign issuers out of the US changes exclusively to the
debt and equity markets. American regulatory and
Now, in the wake of the legal environment.
credit crisis, Americans For proof, take a look
are told the opposite is at a research report pub-
true, that the U.S. was in lished by the Federal Re-
fact under-regulated. serve Bank of New York
But whatever its in 2007 entitled Evaluat-
problems, the U.S. should ing the Relative Strength of
not be counted out. The the U.S. Capital Markets.
21st century may not be New York can still be the heart of the financial markets i-stock This noted that the migra-
a second American cen- tion of European issuers
tury. But although some trends augur the rise of capital mar- away from the U.S. began in the mid-1990s, years earlier than
kets in Europe and Asia, none unambiguously suggests that the enactment of Sarbanes-Oxley and without any suggestion
London, Hong Kong from issuers that new liti-
or Shanghai will eclipse The collapse of American retail and investment gation risk played a factor
New York. What con- in selecting the optimal
sideration of these issues banks caught market participants and public exchange on which to list.
does suggest is that the The same study reported
regulatory framework we
officials largely unprepared, and stoked a dramatic rise in the
put in place in the wake criticism of the U.S. percentage of European
of the current crisis is un- firms listing in their do-
likely to be the most significant factor determining the future mestic market and a pronounced drop in cross-listings among
of New York as the global financial capital. all major exchanges. The pattern that emerges is the well-docu-
Perhaps the most significant trend to be mindful of is mented phenomenon of home market bias.
historical and dates back to policy decisions made at the end Competitiveness
of the Second World War. It is true that U.S. foreign policy Weigh the losses
is frequently derided as unsophisticated and ineffective, with A similar change in listing preferences has been noted for Chi-
criticism often concentrating on actual or perceived policy set- nese companies, which have been encouraged by Beijing to list
backs. But such attacks, whether accurate or not, obscure the domestically. In addition to the Shanghai Stock Exchange, Chi-
profound success the U.S. has achieved in its paramount goal nese companies now have the option of listing on the -inspired
of transplanting its model of a market-based economy over- second board of the Shenzhen Stock Exchange. Nonetheless,
seas. the losses caused by this shift must be weighed against broader
Since 1945 successive presidential administrations have U.S. interests in promoting capitalism and democracy in
focused U.S. economic and military power, in concert with China.
diplomatic efforts, to defeat communism, reduce trade barriers More telling is the absence of evidence that the rise of Asian
U.S.
and encourage the development of capital markets. The shared nations has negatively impacted U.S. economic growth, an im-
vision, held by the political and business establishment for over portant indicator of the strength of the U.S. capital markets. In
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3. 1980, the 27 states that constitute the European Union (EU) cerns about inflation with Mediterranean fears of stagnation.
had a 28.26% share of global gross domestic product (GDP) Although the immediate concern is promoting continent-wide
based on purchasing price parity (PPP). By 2006, the EU’s economic growth, the central long-term issue in Europe is po-
share of global GDP based on PPP had fallen by almost a third litical integration. That requires a consensus on a European
to 20.42%. Despite the extraordinary growth of China and do- constitution. Following the rejection of the Treaty of Lisbon
mestic angst over the threat of outsourcing to India, the U.S. has by France, the Netherlands and Ireland, the ultimate resolution
experienced a much more modest drop in share of global GDP. of Europe’s political future and its consequence on European
Over the same period it declined to 20.57% from 21.40%. Ad- markets is uncertain. The political climate also calls into ques-
ditionally, China’s explosive growth tion the likelihood of harmonizing
rate, greater than 10% for five years, legal, regulatory and accounting re-
has markedly decelerated over the
In the wake of the credit crisis, gimes across the EU. Failure at this
past five consecutive quarters, and Americans are told…that the juncture to achieve greater integra-
is not expected to expand at double- tion does not preclude the near-term
digit rates for several years. U.S. was in fact under-regulated. ascendancy of a European financial
A second major trend, span- center, but absent further progress
ning the same post-war time period, is the increasingly close on the fundamental issues that lead to unification, London, or
relationship among European states. The profound structural a continental city, would lack a distinct advantage which New
changes, which have transformed capital markets in the region, York receives as the financial focal point of a $13.8 trillion na-
permit European companies to tap domestic capital markets. tional economy.
In particular, the launch of the euro provided greater depth to Demographic trends are also key factors to consider. As fer-
the Eurobond market while bank tility declines and life expectancy
disintermediation, an effect of increases, the world’s population
the Basel Accords, increased the is aging. The U.S. is certainly not
supply of fixed-income instru- immune to this. But more than
ments. As the Eurobond market any other country the U.S. has a
matured it created a virtuous cir- history of successfully integrat-
cle: increased issuance prompted ing a vast number of immigrants
lower underwriting costs. That — and, despite recent controversy
encouraged European borrow- over immigration policy, is likely
ers to eschew issuing overseas, to continue to do so.
while offering globally active U.S. According to median popula-
firms the ability to tap a source of tion growth projections the num-
financing that permits superior ber of Americans in 2020 will
balancing of their assets and li- have surged some 13% from 302
abilities. million to 342 million, while the
Counterbalancing the great number of Europeans will decline
strides European governments from 731 million to 722 million.
have taken to create flexible, Those trends are set to continue:
continent-wide capital markets by mid-century, the U.S. popula-
are emerging economic trends tion is anticipated to hit in excess
that will affect the Eurozone and of 400 million; Europe faces an 8%
capital formation. As a result of decline to 664 million people – an
labor market reforms and corpo- unprecedented decline absent war
Competitiveness
rate cost cutting, Germany had or disease.
in recent years — until the credit Capitalism at work: one of the most successful U.S. exports?
Associated Press
Of course, population growth
crisis intervened — experienced renewed economic vigor and presents its own problems, as does immigration. But declin-
along with the Netherlands and Scandinavian states realized ing populations in European countries and Japan also mean
higher economic growth. these states’ citizens will age more rapidly than in the U.S. That
However, Greece, Italy, Portugal and Spain, which failed means foreign capital markets will face greater strains, including
to aggressively implement reforms, all endured economic pain downward pressure on a broad range of asset classes, as the ra-
as a rising euro undermined their competitiveness. Unless one tio of retirees to the working-age population increases. As Alan
wants to argue that northern Europe’s progress was solely or Greenspan noted in testimony before the U.S. Senate in 2003,
disproportionately a benefit of the credit bubble, the economic aging populations may result in European or Japanese house-
U.S.
data indicate an emerging north-south divide that will require holds consuming more and saving less. Although this could
the European Central Bank to delicately balance German con- also have the consequence of affecting investment in the U.S.,
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4. Greenspan concluded that flexible U.S. labor markets and the between New York and London is narrowing. This comparison
openness of U.S. society to immigrants made the U.S. economy of capital markets is misleading, however, since the total capital
“uniquely well-suited to make those adjustments” necessary to raised on AIM was a mere $2.2 billion. Moreover, the perfor-
manage the eventuality of an aging population. mance of AIM has eroded and the number of companies listed
on AIM is falling.
Contrary data Although Asian commentators suggest that the NYSE and
Lastly, market data do not confirm that New York’s longstand- Nasdaq are no longer favored exchanges for Chinese compa-
ing preeminence has ended. True, the Federal Reserve Bank of nies, the capital actually realized from companies listing on the
New York research note cited above did conclude the U.S. bond A-share market has been negligible. The small capitalization
market has “gradually lost ground to its overseas competitors.” of companies on Chinese exchanges may also account for a de-
Such commentary is part of a growing chorus of reports, includ- cline of 50% on the Hong Kong exchange and 67% on Shang-
ing ones by the U.S. Department of Treasury, the City of New hai composite index versus declines of 40% on U.S. exchanges
York, the U.S. Chamber of Commerce, and the Committee on during 2008. Moving forward, the recent relative performance
Capital Markets Regulation that indicate a loss of competitive- of U.S. and Chinese exchanges may temper the enthusiasm of
ness by the U.S. capital markets. What these reports share in Chinese companies to list domestically and perhaps even en-
common are statistics that purport to expose the downward courage stronger Chinese companies to look to the NYSE or
trends of U.S. stock exchanges or the U.S. bond market. Al- Nasdaq.
though there is intuitive appeal that issuance figures are a direct Harbingers of the rise of European and Asian financial
gauge of market health, year-to-year fluctuations, the selection centers are plainly visible. The issues highlighted in this article
of reference dates, the choice are some of the large-scale
of data sets, and exchange- trends that will shape the fu-
rate movements, among other None of these developments ture of New York, London,
factors, deprive performance Hong Kong, and Shanghai
figures of the clarity they im-
unambiguously suggests that London, — as well as the likes of ambi-
plicitly provide. Other data, Hong Kong or Shanghai will eclipse tious newcomers like Dubai,
meanwhile, paint a very differ- Moscow and Mumbai.
ent picture. New York. Yet these are by no means
Although there is some the only macro factors at play.
indication that the maturation of the Eurobond market has The long-term revaluation of the Chinese yuan remains a con-
drawn activity from the U.S., it has hardly stunted the market. cern. The global competition for scarce resources may lead to
Pre-crisis issuance in the U.S. was at record levels: in 2006, U.S. international conflict. U.S. deficits, which may breach $1 tril-
investment-grade bond issuance totaled $918.9 billion, a figure lion in 2009, will play a crucial role.
surpassed in 2007 when U.S. investment-grade issuance totaled
$978.1 billion. The Wisdom of Nixon
Data on securitized deals reflect this increased activity in Regulation will remain a central part of financial markets, of
Europe. Issuance of asset-backed securities grew almost sixfold course. In fact, the current crisis demonstrates the importance
from €78.2 billion in 2000 to €453.7 billion in 2007. However, of having a well-balanced, thoughtful regulatory environment.
even in the aftermath of the credit crisis European securitiza- Yet one keeps coming back to Nixon’s observation: the
tion is still merely 28% of the issuance of that in the U.S. That’s comparative strength of sovereign states is never clear-cut. An
after an 80% decline in U.S. asset-backed and mortgage-backed evenhanded portrait of global capital markets has to acknowl-
issuance this year — and the figure is biased upward by the ap- edge that the effects of long-term market trends are powerful
preciation of the Euro. So the conclusion we draw is, simply, and difficult to predict individually, let alone in tandem. New
that pre-crisis US markets were more than holding their own. York will surely be challenged as the global financial capital, as Competitiveness
Just as much, if not more so, if one uses IPO proceeds as surely as the U.S. is challenged as the world’s economic power.
a benchmark. The London Stock Exchange (LSE) and Hong But indications of the sustained predominance of the U.S. capi-
Kong Stock Exchange both surpassed the New York Stock tal markets remain. Issuers, investors, and financial institutions
Exchange (NYSE) in 2006. However, analysis of the relative that fail to heed Nixon’s cautionary words by abandoning New
strength of U.S. and foreign financial centers can be distorted York may find themselves on the wrong side of history.
by the choice of markets to include for comparison. From 1998
to 2005, the market of foreign listings on the NYSE, AMEX
and Nasdaq increased relative to the LSE’s Main Market. A no- Jason Glass and Ed De Sear work in the New York
ticeably different conclusion is reached by the inclusion of the office of McKee Nelson LLP. Ed De Sear is a Partner
LSE’s Alternative Investment Market (AIM) in the data set. in the firm’s structured products practice.
U.S.
The 220 foreign listings on AIM as of 2005, when added to the
total of the Main Market, create the impression that the gap
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