Dark Days For the City of London

Indeed, London staffers seem certain to suffer worse than their New York counterparts. The same flexible labor market—by European standards, sacking is cheap and easy in Britain—that helped to lure overseas players to the City now means the London workforce will be the first in line for cuts. "If foreign banks are going to shed 10 to 15 percent of their staff, they are going to do it overseas because there is less political pressure," says Andrew Hilton of the Centre for Financial Innovation in London. By some reckonings, the City is set to lose 40,000 jobs this year, out of a total of some 350,000.

But the effects will be felt far outside London. The success of the City has bred an unhealthy dependence on the financial-services sector, which last year accounted for nearly 10 percent of the British economy, up three points in the past 10 years. For the Treasury, the City was a golden goose. The public's anger over rocketing bonuses—City workers shared £13.7 billion this year—was a necessary price for prosperity. Financial-services companies provided 25 percent of all corporate tax revenues in 2007—double the figure 25 years earlier.

And right now, Britain can ill afford the City's failure. Even before the latest crisis, consumer confidence was in free-fall. House prices, driven upward by City money, are falling at their fastest rate in 20 years—down 13 percent since last autumn. Unemployment, at 1.7 million already at its highest level since 1998, now looks set to hit 2 million, or 6 percent by the end of the year. Sterling has dropped 12 percent against the dollar and the euro in the past year. But don't look for a handy boost in exports of manufacturing. As financial services grew, industry shrank, shedding more than a million jobs in the past 10 years.

The big fear: that government will aggravate London's suffering, screwing down the City with stricter rules that destroy its essential character. The ban on short selling, blamed for helping to sink the banks, has already rattled nerves. "In the search for a scapegoat the regulatory environment will suffer," says Antonio Borges, chairman of the London-based Hedge Fund Standards Board. "Our concern is not with the regulators; it is more with public opinion, which drives the political process. We have seen what's happened in the U.S.; now we're afraid it could happen here."

If so, there's a chance that some players might quit Britain altogether. "There are plenty of alternative offshore centers, and the possibility [of leaving London] is always there," says Borges. "Switzerland has a long tradition of asset management, and there is no doubt they would like a larger share of the hedge-fund industry." Maybe, but there's another lesson to be learned from recent events. For the big players, it is that big countries make the best bases. Could the Swiss, for example, afford to stand behind their banks if a collapse were imminent? asks David Freud. "The country is too small to stand behind its banks. A good, solid taxpayer base is very attractive in these circumstances." As Gordon Brown has just demonstrated.

© 2008