London Falling

When the 4,500 people who used to work for Lehman Brothers in London showed up at the investment bank's plush office on Canary Wharf on Sept. 15, only to be told that the firm was out of business and that they should look for another job, some of them did what any number of their colleagues around town have been doing for years: they threw a party. On the equity-trading floor, the internal p.a. system known as the "hoot" blared out the R.E.M. song "It's the End of the World As We Know It." And then, after collecting their personal possessions, dozens of the Lehmanites crossed the concourse to the pub just opposite, All Bar One, where they drowned their sorrows in style. "People were spending five or six hundred pounds on champagne," recalls a bartender.

It was a fitting end to what has been a remarkably bubbly period for London. Over the past decade and a half, ever since its last protracted downturn, the British capital has transformed itself into Europe's indispensable financial center. Leaving Frankfurt and Paris in the dust and encouraged by the policies of Gordon Brown, the current British Prime Minister, it has become a magnet for people, jobs and investment from around the world. The big U.S. banks made London their international hub, and the major banks of continental Europe moved much of their trading and investment-banking operations there. About 70% of international bonds, one-third of the world's foreign exchange and almost half the total volume of international equities are traded in London--more even than in New York City, its only remaining rival as the world's financial capital. Hedge funds piled into Mayfair on the heels of private-equity players. Any self-respecting Russian oligarch has a Knightsbridge mansion, sends his kids to élite private schools and has listed his company on the London Stock Exchange.

All this activity has made the City--the square mile around St. Paul's Cathedral that is the heart of the old financial district, plus the gleaming towers of the new financial district in the docklands area--a powerful motor not just for London but also for British prosperity. In 2007 financial services accounted for 10.1% of the U.K.'s gross domestic product, up from 5.5% in 2001. Add in professional services linked to finance, such as accounting, law and management consulting, and the total rises to 14%. And that's for Britain as a whole. For London, finance has been even more important: it accounts for almost one-fifth of the city's total output, perhaps as much as one-third if professional services are included. That's far more than for even New York City, where financial services account for about 15% of its economy.