By Alexis Xydias and Michael J. Moore
July 27 (Bloomberg) -- David Butler, who advises hedge funds on tax issues, says he helped 23 firms leave London in the past 18 months, most of them for Switzerland.
“Managers do not feel there is a good relationship with politicians,” said Butler, founder of Kinetic Partners LLP in London. “When it is announced that taxes will go up, without any consultations, people understand there may be more on the way and they think the lifestyle they can have somewhere else is better than in London.”
Butler is one indicator London’s recovery from the worst financial calamity since the 1920s may take longer than New York’s. While both cities have claimed bragging rights as the capital of global capital, London’s financial district was hit harder than Wall Street.
The U.K. capital shed almost twice as many finance jobs as New York as a percentage of the total. Its workforce shrank by 29,371 in 2008, or 8.3 percent, according to the London-based Centre for Economic and Business Research. New York lost 20,200 financial-services jobs, or 4.3 percent, data from the New York State Labor Department show.
The value of daily trades on the London Stock Exchange fell 41 percent in the first half of this year from the same period in 2007. At the New York Stock Exchange, the drop was 29 percent.
IPO Revenue
Revenue from advising on initial public offerings in New York this year outstripped that earned in London by almost 16 times, data compiled by Bloomberg show. Fifteen companies sold shares for the first time in the U.S. this year to raise $2.67 billion, according to data compiled by Bloomberg. In the U.K., there has been one IPO for $349 million.
The value of U.S. mergers and acquisitions announced this year totaled $372.1 billion as of July 24, Bloomberg data show. That’s 37 percent more than the $272.3 billion announced in Western Europe in the same period. In 2007, the spread was 4.3 percentage points.
“By far the biggest revenue fee pool in investment banking still is in the U.S.,” Deutsche Bank AG Chief Executive Officer Josef Ackermann told Bloomberg News. “It’s difficult to make it there, but absolutely necessary for a global investment bank. The U.S. is strong in many ways, above all in its pragmatic approach to problem-solving, and this should help them to overcome the crisis.”
Frankfurt-based Deutsche Bank, Germany’s biggest bank by market value, doesn’t disclose what fees it earns by cities.
‘Arbitrage Game’
As markets recover, European leaders are calling for restrictions on traders’ bonuses and investment strategies. In Britain, Prime Minister Gordon Brown’s government plans to force banks to hold back half of all bonuses for senior traders and executives for as long as five years. The U.K. has lifted income taxes on the rich to 50 percent from 40 percent, effective next April, pushing the top rate above that in the U.S., France and Switzerland, according to figures from the Organization for Economic Cooperation and Development.
London also faces competition from regional hubs such as Zurich and Monaco, neither of which is covered by European Union regulations.
“Governments should be careful not to start playing an arbitrage game with people who live and breathe arbitrage for a living,” said Luc Huyghebaert, head of business development for Eagle Advisors Ltd., a London-based fund of hedge funds. “London’s hedge-fund industry is to a large extent made up of migrants. Push them hard enough and they’ll leave.”
The City
All the griping about taxes and regulations isn’t likely to end London’s run as one of the world’s top financial centers, according to economists and money managers. About 80 percent of assets under management by hedge funds in Europe are in the U.K. capital, a level that hasn’t changed in recent months, said Christen Thomson, a spokesman for the Alternative Investment Management Association, an industry trade group based in London.
“London remains the trading and information center,” said Peter Hahn, a former managing director of Citigroup Inc. who now lectures on corporate finance at London’s Cass Business School. “The reality is the majority of the players are here, and that’s likely to stay.”
Even if hedge funds don’t depart, London’s financial district, known as the City, may be left at a disadvantage, said Willem Buiter, a former Bank of England policy maker and now a professor at the London School of Economics.
“There hasn’t been a systemic crisis of this nature in recent times, and it has shown the limits to the long-term viability of the City,” Buiter said. “The age of light-touch regulation is clearly over. Although it remains to be seen what will happen on the regulatory side in the U.S., the U.K. is now at a disadvantage.”
Regulatory Overhaul
Britain’s Financial Services Authority is overhauling its regulatory regime, in place since the watchdog agency was created 12 years ago, which is credited with helping London compete with New York. The FSA has pledged to take a more active role overseeing who banks hire and how they pay them. It is also considering monitoring leverage at hedge funds.
“I don’t think it is very wise what the government is doing,” said Karsten Schroeder, chairman and CEO of Amplitude Capital AG, which oversees almost $1 billion for clients and which relocated to Zug, Switzerland, from London in December. “London has become a less attractive environment.”
‘Absolute Disgrace’
New EU rules governing alternative investors, proposed in April, would require hedge-fund managers to report their strategies to authorities. The legislation, which has been criticized by Britain’s Treasury Minister Paul Myners and London Mayor Boris Johnson, would give regulators the power to restrict a firm’s borrowing and allows for the future setting of industrywide debt limits. Myners said earlier this month the proposal needs “major surgery.”
“If the EU rules are enacted, these hedge funds will go to New York or Shanghai,” Johnson said in a speech to business leaders on July 9.
The reform proposals come amid cries from government officials in Europe to limit bankers’ pay. French Finance Minister Christine Lagarde said on July 21 that banks paying guaranteed bonuses are an “absolute disgrace.” German Finance Minister Peer Steinbrueck said last October there should be a 500,000-euros ($708,000) ceiling on compensation for bankers who work at companies that receive government aid.
Brown, Cameron
Regardless of who wins the U.K. election, which Brown must call by June, bankers can anticipate political opposition to traditional compensation plans. Brown and the Conservative Party endorsed recommendations by David Walker, ex-chairman of Morgan Stanley International, forcing banks to hold back half of all bonuses for up to five years to discourage excessive risk- taking. The proposals also would require banks to disclose in annual reports how much they pay their top traders.
“If bonus structures are irresponsible, banks will be made to hold more capital against them -- akin to a tax,” Conservative leader David Cameron said on July 20. “The financial sector must understand that it cannot behave like the crisis never happened.”
Neither Cameron nor Brown has endorsed caps on pay, and the Walker proposals won’t necessarily lead to a significant change in the way banks reward their most senior people. Even before the crisis, executives received a large portion -- often the majority -- of their bonuses in the form of restricted stock that they’re not allowed to sell for years.
Obama Reforms
The Obama administration hasn’t called for pay limits either. This month it sent draft legislation to Congress that would seek to make compensation committees independent from the executives whose salaries they set and give shareholders a non- binding vote on pay packages.
“We are not capping pay,” Treasury Secretary Timothy Geithner said on June 10. “We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives.”
New York and London have been vying for supremacy for most of the past decade. A study by New York consulting firm McKinsey & Co. released in January 2007 concluded that the U.S. would lose its place as the leading financial center in the next decade without legal and regulatory changes. Henry Paulson, then Treasury Secretary, said in March 2007 that keeping the U.S. the world’s dominant capital market “is a high priority for me.”
Rival Studies
A 2008 report by PricewaterhouseCoopers LLP, commissioned by the Partnership for New York City Inc., ranked London first in the world for financial clout and second to New York in “lifestyle assets” and “intellectual capital.” In March, the Global Financial Centres Index, published by the City of London, rated the U.K. capital as the top financial center, ahead of New York.
“London rivaled New York for probably about five years, from about 2002 to 2007, in investment banking and trading circles,” said Charles Geisst, a finance professor at Manhattan College in New York and author of a history of Wall Street. “I think the crisis, so far at least, has been worse in London.”
The number of hedge fund managers who are considering leaving London is increasing, said Butler of Kinetic Partners.
“Funds aren’t rushing to the exit, but there is a trend emerging here and the funds consulting about relocation are also getting larger in size,” Butler said.
Pierre Lagrange isn’t fleeing. The Belgian-born co-founder of GLG Partners Inc., an $18 billion money-management firm, will mark his 20th anniversary in the U.K. capital next year.
“We’re going to do a party celebrating 20 years in Britain,” Lagrange said at a hedge-fund conference in Monaco in June. “Taxes come and go. We’re definitely going to stay.”
To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net.
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