The handwringing over London

I may have missed it, but Danny Boyle seemed to have left out the City and the banks from his Olympic mash-up extraordinaire Friday (the FT has a column Monday by John McDermott that sums up the Boyle masque: "A ceremony for barmy Britain and a baffled world." You could also call it Britain as seen by Hollywood.) A pity. There are enough really strange goings-on in the Square Mile to fit in, maybe somewhere after the rising chimneys -- the Brits invented pollution! -- and before the National Health Service and its relation to children's literature, which must involve a nanny somewhere. Clearly, the banks have been written out of the narrative, which is strange because, for all their problems, finance remains London's most important industry and London dominates the British economy. The Financial Times continues its handwringing over the fate of London as a financial center today, with an analysis piece topped by the anxious headline: "London's precarious position," followed by the deck: "As the City faces reputational fallout and harsher regulations following recent scandals, rivals look set to reap rewards."

It's true: London has had a lousy time of it of late, what with a seriously slumping economy; a series of scandals ranging from AIG Financial Products to JPMorgan Chase & Co.'s trading blowup to the Libor mess to IT screw-ups at among other banks, state-owned Royal Bank of Scotland; and a sense of populist outrage captured by the outcry over Barclay's Bob Diamond, who was sent packing home to America with roughly the same treatment Mitt Romney is currently getting. And, as usual, there's much concern about financial regulation in the City, particularly the Brits' "light-touch" or principles-based regulatory philosophy, which is always a threat when things go awry. (It is interesting how rules-based systems and democracies seem to go together. Principle-based oversight has about it a faint whiff of a more autocratic, or perhaps more naively technocratic, age. It's based on trust, and the belief that regulators know what's going on and will take care of things.) Next year the Financial Services Authority will give regulation of the banks back to the Bank of England. That's a little like the Federal Reserve picking up more oversight powers after a crisis that it missed entirely and helped ignite.

The FT seems to think all of that poses a threat to the City's global position, though why regulators should be blamed for banking mistakes -- like the JPMorgan trading loss -- rather than Libor-type malfeasance is beyond me. "One chief executive who has yet to be embroiled in such scandals believes London will be a clear loser in coming months and years, with rival financial centers, particularly in the U.S., benefiting. 'The New York-London spread is not looking good,' he says. 'More bad things are happening. And there is more overreaction from the regulators.' "

Let's ponder this. First, what kind of chief executive is this single source? Since he hasn't been embroiled in scandal, he must run some sort of financial firm. Second, whoever he is, he offers no evidence beyond a depressed sense that regulators are getting tougher. Third, what city would steal London's business? Well, given the state of Europe, it's unlikely to be the traditional local rivals, Frankfurt or Paris. It could be Asia -- Singapore, Shanghai, Hong Kong. But for the moment -- and this divination of future prospects for financial capitals is always of the moment -- those economies are slowing, and beside, London has a sort of geographical necessity that reduces direct competition with Asian cities, which are pitted against each other. That leaves New York, which only a few years ago was bemoaning its decline to London. What's fascinating here is how a Wall Street-oriented CEO type -- call him Jamie for no particular reason -- would produce the very same complaints here. Regulation is becoming too heavy; the politicians and populace are mean to us; and there are too many inane rules. Trust has been lost. Maybe we'll move to a place that likes us.

It was never clear in the first place that London was establishing clear superiority over New York; like free trade, the two cities seemed more synergistic than competitive. It's also very unclear how important relatively subtle differences in regulation matter. Regulatory arbitrage is a powerful force, and it may drive a race to the bottom, but it is interesting that financial centers globally have shrunk to a very small number in a period when firms were supposedly scouring the globe for regulatory advantage. In short, there are any number of other factors beside regulation that determine a financial capital. London has held its positions through world wars, economic turmoil and sweeping changes like globalization, Big Bang and the euro. There are a lot of skills in London, and a critical mass of markets. Misbehavior of one sort or the other from a few banks is not going to shake the foundations of a financial center with London's long history. "Reputational fallout" is overstated.  

Like Boyle's Olympic allegory-on-steroids, the fearful soul-searching of finance in Britain tells you more about the shaky confidence of Britain as a nation than anything of great substance or profundity. In both cases, Britain finds itself at center stage and forced to explain itself to a world that has long forgotten there was an empire once. Both betray a desire to embrace a powerful past and escape it. In finance, those mixed feelings run particularly strongly. The Brits have fallen out of love with high-flying finance -- for now. But they really can't get along without it. After all, the place really does not operate on sheep herding and Olympic ringmaking. And Paul McCartney, like the queen, isn't exactly a kid anymore. - Robert Teitelman