For decades, Wall Street has been the driving force of global capitalism. But the sub-prime crisis and its aftermath have seen the wheels fall off the world’s most efficient money-making machine. So how likely is Wall St to be overtaken by other financial centres? 
 
Story Tony Malkovic 
 
In October last year, while markets were in free fall, an intriguing scene was unfolding in Wall Street. 
 
News outlets reported that outside the New York Stock Exchange, tourists, schoolchildren, TV crews and even buskers had gathered to stare, chatter and take photos. 
 
In effect, those onlookers were a bit like the ghouls who gather at a highway pile-up. They weren’t exactly sure what they were witnessing, but they realised something dire was happening, that things might never be the same again. 
 
US financial analyst Peter Schiff is convinced of it. The outspoken economist and author – dubbed by some as ‘Dr Doom’ – says New York now has the potential to be the next Detroit. 
 
What he means is that for decades Detroit used to be the global capital of the automobile industry. More recently, it’s been overtaken by other countries, its reputation has been wrecked and the once mighty trio of General Motors, Ford and Chrysler had to beg for billion-dollar handouts. 
 
“I think Wall Street is going to lose its role as the global financial centre to other sectors around the world for the same reason,” Schiff predicted in a video interview with Forbes magazine. “I think our reputation has been destroyed, we have spread bad investments around the world.” But is it too early to write off Wall St? After all, it’s had a habit of bouncing back from crises for more than 150 years (see breakout story page 43). 
 
Curt McDonald tells two stories that highlight the incongruities of working on Wall St. 
 
One involves the first day he started at the now infamous Bear Stearns investment bank. It seems that the company that paid its executives multi-million dollar salaries and bonuses could also be a real pennypincher in other areas. 
 
“I remember when I joined there – they were viewed as being a frugal firm – I was given a small bag of rubber bands and a small bag of paperclips and told ‘Use them well, because they’ll be the last you’ll ever get!’,” McDonald recounts. 
 
The other story involves the roundthe- clock approach to sealing deals: the excitement, the exhaustion – and the eateries. 
 
“The experience of living in Manhattan in a certain sense, was about that: it was about working very hard, and eating well,” he says. 
 
“There were large numbers of people who claimed with great pride that they had a kitchen – but they never touched it, they were eating out 24/7, they never ate a meal in.” 
 
Dr McDonald is an economist who now works in Australia as head of risk at Kerry Stokes’ Australian Capital Equity, where he’s part of a team managing the firm’s assets. He joined in late 2001 after working for five years on Wall St with firms such as Bear Stearns, Citicorp and others. He’s also been a consultant with the World Bank and other international organisations. 
 
Sloppy Individuals 
He looks back on his stint at Wall St with fondness but says that, by 2004, it was evident that Wall St was an accident waiting to happen. There was too much money, too many deals and too many individuals sloppy on details and unaware of the risks involved. 
 
“There was so much money to be put to work, that people were doing less and less homework with each successive deal,” herecalls. 
 
“And as long as it passed a bit of a ‘sniff’ test and the rating agency gave it the right rating, you naturally bought it. And everybody was doing it.” 
 
McDonald worked in the area of emerging markets, mostly in Asia. Shortly after he started on Wall St, the 1997 Asian financial crisis hit. 
 
“What you learn about emerging markets is that they’re a great laboratory for all these issues, because anything that can go wrong in emerging markets, will go wrong sooner or later,” he explains. 
 
“That turned out to be a great training ground for the sort of problems we see unfolding now, particularly what happens when money gets too cheap for too long. And that’s probably at the heart of the maladies we’re now suffering.” 
 
McDonald believes it’s too early to call the death of Wall St and too early to call the rise of Asian financial centres for two reasons: skilled individuals and sound infrastructure. 
 
“You have to remember there’s a tremendous amount of human capital on Wall St,” he says. “There is now a very, very large number of individuals who know a great deal about financial management. The good news about Wall Street is that the machinery is all set up there. 
 
“There are large numbers of people and institutions etc who, when the opportunities arise, are able to do deals. 
 
“One of the things we take for granted in all these discussions and don’t talk about is the very, very long history of financial markets in the centres such as New York and London,” he says. 
 
“These centres are based on a well understood and much-trusted system of property rights, legal precedents and other frameworks which enable the trust to be maintained on a day-to-day basis to get deals done. 
 
Body Blow 
“We might argue that trust has taken a significant body blow in recent times, but it doesn’t mean those systems, those foundations for capitalism and finance as we know it, have just melted away. 
 
“They’re still there, and out of the ashes, there’ll be large numbers of people reforming themselves into new firms and new organisations and shifting with the times to serve whatever needs there are. 
 
“These are exactly the things that many Asian centres, particularly the untested Chinese financial centres arguably lack. 
 
“This is the classic problem with emerging markets, this is why they’re still emerging, still developing. They lack those institutions that we’ve come to take for granted in modern, developed capitalist societies. And without them, the wheels of finance cannot turn.” 
 
Although he’s bullish about Wall St, he says there’s a diaspora under way as many people who lost their jobs seek opportunities in other parts of the world. And many of them are bound for Australia. “I think that’s certainly the case. We already know there are large numbers of Australian ex-pats coming back from London and New York. Inevitably, they will reinforce the Australian skill base,” he says. 
 
“My hope is that they reinforce the skill base on the money management side. Generally speaking, far too much of the money to be managed in Australia is tied up in the hands of a few, very large superannuation funds. 
 
“I think what we need to see is what I call a more even distribution of money being managed across a larger number of institutions.” 
 
Where Next?  
So with Wall St stalled, what other financial centres might overtake it? 
 
Well, you could almost open an atlas and take your pick. Which, in effect, is what PricewaterhouseCoopers has recently done. It brought out the second edition of its Cities of Opportunities report, a comparison of 20 cities that are centres of finance, commerce and innovation. If you want to know where to do business on a global scale, it’s a pretty good staring point. 
 
The report looked at 51 criteria and ranked the cities accordingly. It was undertaken by PwC and the Partnership for New York City, a collection of business leaders dedicated to maintaining New York’s position as a centre of finance and innovation. 
 
As you’d expect, New York scored well in certain areas: it topped the categories of Intellectual Capital, Technology IQ and Innovation and Sustainability. 
 
But in several key categories, London got top billing. 
 
For instance, in the category Openness for Business – which looks at how powerful each city is as a magnet for finance and commerce – London was the clear winner, followed by Paris and then New York. In the Financial Clout category – which looked at each city’s success as a global business and financial centre – London again ranked highest, with Paris and New York tied in second place. 
 
And when it came to rating Ease of Doing Business, London again outscored New York. (Mind you, both cities were well behind Singapore, with Hong Kong coming second.) 
 
Wall ST Comeback 
So has the Big Apple lost its shine, perhaps permanently? 
 
Scott Lennon, a partner at PricewaterhouseCoopers and head of its Economic Group in Sydney, doesn’t think so. 
 
“I think that’s somewhat pessimistic, I think New York will remain home to some of the world’s largest and most efficient financial markets which are operated by high-calibre staff leveraging critical intellectual property,” he says. “I think Wall Street will make a comeback. The US is still the world’s largest economy and New York is at the forefront of that.” But things are slowly changing, says Lennon. 
 
“I think there is a very gradual lessening of the dependence on a couple of key global markets,” he says. “New York, London and Tokyo for many years were the financial troika and I think several cities have been chipping away at that. 
 
“You’re seeing places like Shanghai, Mumbai, Singapore and Hong Kong now playing key roles as strong financial markets. The economies they service have provided sizeable growth to foster their emerging global prominence. 
 
“You will see some gradual changes in market share, but I think the global markets are evolving so that each time zone will be serviced by a dominant market supported by peripheral markets. 
 
“It’s going to be interesting to see Singapore and Shanghai jostle. Mumbai will also make some progress with improved economic prosperity across India, as well as being in a slightly different time zone to the other two. 
 
“I think financial markets will have a relatively subdued FY2010 as we hopefully begin to recover from the global financial crisis. And we expect Sydney as a financial market to play a significant role in this recovery, as we continue to compete in a credible way with Hong Kong and Singapore to be the Asia-Pacific financial hub. 
 
Safer Place 
“Australia should hopefully have a relatively shorter downturn following the global meltdown due to our stronger economic fundamentals. 
 
“For instance, Australia has a diversified economy featuring a sizable commodity base, our Big Four major banks have Double A credit ratings – out of about only 14 in the entire world – we have a trusted and efficient stock exchange, a credible reserve bank, very low political and sovereign risk, and we’re generally accepted as a safer place to do business.” 
 
Ira Kalish also thinks you shouldn’t write off New York. 
 
“What’s happening now is nothing new. We’ve had financial crises before and we’ve had economic downturns before,” he says. “If you look at what happened in the Great Depression in the 1930s it was a lot worse in terms of the loss of asset values on Wall St and the loss of employment, and Wall St eventually bounced back.” 
 
Kalish is based in Los Angeles and travels the world as the Director of Global Economics Research with Deloitte. He says Wall St may have stalled, but it will get back into gear. 
 
“We will always need in this country (the US) a financial capital and it’s hard to see how it could shift to anywhere else,” he points out. “Even though capital markets are global and there are a number of global centres of capital markets, we still have to have large ones in the United States because we’re the largest economy. So I think Wall St will bounce back.” 
 
Kalish says a key strength is that the people on Wall St know the nuts and bolts of deal making. 
 
“It doesn’t matter what the wages are, it matters that you have the expertise so that you can tap into that expertise when building an organisation,” he says. “And there’s no other place in North America, other than Wall St, where that human capital exists. 
 
“Although there will be migration of people to London, Hong Kong and places like that, it pales next to the number of people who remain in New York that organisations will tap into when the economy ultimately recovers.” 
 
And there’s another intangible: the buzz of living and working in New York. “Financial markets tend to gravitate to cities that have a decent quality of life,” he says. 
 
“That incudes a relatively benign regulatory market and some of the attributes of living that people in creative industries tend to enjoy – a strong cultural environment, free flow of information, that sort of thing. That’s one reason I think we won’t see Shanghai become a financial centre to compete, say, with Hong Kong.” 
 
Dented Reputation 
Shane Oliver says New York’s reputation might have been massively dented by the sub-prime crisis and its aftermath, but dubbing it the next Detroit is fanciful. “Detroit, I think, has suffered from overreliance from one particular industry, and it has become uncompetitive compared to the auto industries in other parts of the world,” he says. 
 
“It’s hard to see other financial capitals in the world taking over from New York in the short term. Europe, for instance, has been just as badly affected by all this, whether it’s London or Frankfurt. 
 
“The only other potential centre that could take over from New York is maybe Shanghai. But at the moment, the Chinese sharemarket is relatively small and there are massive restrictions on the participation of foreigners in the Chinese sharemarket. So in many ways, it’s still very much a closed sharemarket.” 
 
He says there’s no doubt that over the next few decades there will be a steady decline in the importance of New York relative to Asian financial centres, but it will be a long and slow process. 
 
Right now, he says, the world is still very much tuned in to Wall St: “New York is the financial capital of the world. We get up in the morning and we want to know what happened in New York, and that’s pretty much the story everywhere around the world. The focus is on the US in setting direction. 
 
“That said, over the past few decades we have seen a steady shift in economic power away from the US towards Asia in particular. And I think the events of the past year will only accelerate that. 
 
“It’s inevitable that sometime in the future, we will get up in the morning and turn on the radio and the first thing we’ll hear in the finance news will be what the Shanghai Composite Index did. But I reckon that stage is still 20 years away. It’s coming, but it’s a long way away.”  
 
Will it Take 25 Years This Time?  
The start and end of every trading day on the New York Stock Exchange is heralded by large brass bells ringing on the exchange’s four trading floors. But is it too early to ring the bell on Wall St itself? 
 
The term Wall St refers to more than just the street that runs several hundred metres in lower (southern) Manhattan. The term also takes in the wider NY financial district and part of mid-Manhattan where many major banks have their headquarters. 
 
And although Wall St has been the heart of finance and trading since 1792, the NYSE is not the oldest exchange in the country. 
 
The Philadelphia Stock Exchange is regarded as the country’s oldest, having started some two years before. The events of the past year have sparked much speculation about Wall St’s future. 
 
In a cheeky look ahead, Wired magazine recently published its version of what Wall St might look like in five years’ time – and it’s not entirely flattering. 
 
The magazine doctored an image of the NYSE exchange – with its giant US flag draped over its façade – to show a giant Chinese flag hanging beside the Stars ‘n’ Stripes. The NYSE’s name is written at the top of the building – in English and Chinese – and the caption is ‘Brother, can you spare a Yuan?’ 
 
Clever, but maybe not prophetic. Although the current global financial crisis has everyone obsessing about what will happen next, Wall St has an uncanny habit of bouncing back. 
 
That includes crises such as the Panic of 1857 and the Panic of 1907 (a crisis sparked by rumours involving the Knickerbocker Trust bank, which even the NYSE claims as the most severe financial crisis to date). 
 
And of course there was the Crash of 1929; as well as Black Monday in 1987, when the Dow Jones recorded its largest one-day plummet – 22.6 per cent. Mind you, although Wall St recovers, it can take its time. 
 
After the 1929 Crash, for instance, it took another 25 years – until 1954 – for the Dow Jones Industrial Average to exceed the 1929 peak. 
 
“In terms of asset prices, we haven’t seen (in recent times) what happened in the Great Depression,” explains Ira Kalish. “Between 1929-33, equity prices fell by 90 per cent – we haven’t had that happen and I don’t think we will. It will take time for Wall St to recover – maybe several years – but it’s not going to take 25 years.” 
 
All of which suggests that, despite the recent catastrophes, it might still be too early to ring the big brass bell to signal the demise of Wall Street.