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It's been downhill ever since. First came the run on Northern Rock, the stricken bank that the government ended up nationalizing and whose near failure raised serious questions about the effectiveness of U.K. banking regulation. Then came a damaging political storm over the taxing of "non-doms" wealthy foreigners who move to Britain and are taxed only on their U.K. income. Following last month's rescues of HBOS and Bradford & Bingley, the big question now is what sort of new regulatory measures will be put in place as a result of the current market meltdown. Fraser, the City's policy head, is hoping that any changes will be peripheral. "We'd be in much greater danger if financial services accounted for just 3% of the economy," he says. "Politicians recognize it as an important industry and are sensitive to the issues."
But at the annual Labour Party conference last month in Manchester, delegates adopted a new vocabulary. In fringe meetings, speakers inveighed against "the spivs" who caused the mess, while union leaders and politicians raised cheers by bashing the rich. Brown's keynote speech talked of a new era that demands heavier regulation, an era in which the rich will "be able to look after themselves." That sort of talk sets off alarm bells. "There is a risk that a mood could emerge, an anti-City mood," says Douglas McWilliams, chief executive of London's Centre for Economics and Business Research. "You sense that now with the Labour Party in a rather weak state, there could be a bit of populism that could actually do some damage."
Braced for Pain
This isn't the first crisis London has lived through, and it won't be the last. At his Guildhall office, policy chief Fraser talks about his 45 years of experience in the City and says, "You just have to sit it out. It recovers." But he acknowledges that "it's a painful process and we are only at the beginning." The impact won't be felt across the board, either. Barring a financial cataclysm, London will retain its position as Europe's preeminent financial center for players from around the world. Some wealth management may migrate to Singapore or Dubai, rapidly emerging regional centers, and some of the back-office jobs that are cut may never come back. "As in any business there will be more pressure to take more support roles out of London, to Asia or just to cheaper places in Britain," says Owen Jelf, who heads the U.K. capital markets practice at consultancy Accenture. But nowhere other than New York boasts the combination of specially tailored office space and clustered expertise to challenge London's status. "I don't see how what is happening will upset London's position as the fulcrum of finance in Europe," says Marc Lhermitte, a partner at Ernst & Young in Paris who specializes in foreign-investment issues. And even in the worst-case scenario of continued market turbulence and a deep recession, the London economy has one crutch that won't be knocked down: huge government spending on preparations for the 2012 Olympic Games.
The bigger question is whether the risk-taking, hard-charging, high-living times will give way to a quieter, duller, less profitable and far more regulated era not so much a golden age as a golden cage. The debt-fueled days are almost certainly history, and households across the capital will have to tighten their belts and live with a lot less leverage; the banking crisis has already made it considerably harder for house buyers to get mortgages of any sort, let alone ones requiring only a tiny down payment. Jon Lloyd, joint head of LG's real estate practice, points out that the investment-banking mentality of the past few years ever bigger fees for ever more complex transactions has spread to all sorts of businesses, from law to real estate. He wonders whether that's all about to change. "Will we as advisers fall back to where we were 10 to 15 years ago?" he asks. "The question is whether we are now entering a more frugal world."
Lloyd already knows the answer, and so do thousands of others who have thrived off the good times in the City. Yes, London is heading for a fall. Yes, the excesses are about to be wrung out of the system. Yes, it will hurt. But he remains sure of one thing. "We've got a city we are proud of," he says. "There's a feeling that London is a good place, and that hasn't changed." At troubled times like these, a stiff upper lip may be just what's needed.
With reporting by Eben Harrell, Catherine Mayer and Adam Smith / London