London Falling

The Gherkin was built in flush times. New buildings are being scrapped

TOM STODDART / REPORTAGE / GETTY FOR TIME

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The Alternative Investment Market (AIM) is a good example of how London got so big in the first place and how it's starting to pay the price. Launched in the mid-'90s as part of the London Stock Exchange, this market for small companies deliberately set out to cut to an absolute minimum the paperwork for listing firms. There's no need, say, for bulky official prospectuses before a stock is listed on AIM, and the market is overseen not by official regulators but by brokerage firms called nomads, which are responsible for the new issues. For years, AIM was a fabulous growth story, attracting more than 2,500 companies from around the globe. But in the first eight months of this year, only 85 companies listed on AIM, compared with 201 in the same period a year ago--and almost twice as many have dropped off it. "Capacity is massively down," says Tom Nicholls, a partner at the London law firm LG who specializes in matters related to AIM. So are the nomads--their number has dropped from 80 to 69.

All of this amounts to a particularly tricky issue for a man who has played a key role in the City's growth: Prime Minister Brown. In the 10 years when he was Chancellor of the Exchequer, his support for financial services was especially notable because his Labour Party had a history of antagonism with the City. Brown sought to convince the financial community that New Labour would be pro-business, pro-enterprise, noninterventionist and keen to cosset the rich, believing their wealth would trickle down to the wider economy. Brown also championed a new governance system for financial services that he and other politicians like to refer to as "light-touch" regulation. In June 2007, just days before he replaced Tony Blair as Prime Minister, Brown gave a rousing speech at the traditional black-tie dinner in Mansion House, the residence of the lord mayor of the City, brashly predicting an "era that history will record as the beginning of a new golden age for the City of London."

It's been downhill ever since. First came the run on Northern Rock, the stricken bank that the government ended up nationalizing, 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 on their U.K. income only. Following last month's rescues of HBOS and Bradford & Bingley, the big question is, What sort of new regulatory measures will be put in place as a result of the current market meltdown?

There was more than a hint offered at the annual Labour Party conference last month in Manchester, where delegates adopted a new vocabulary. In fringe meetings, speakers inveighed against "the spivs" (British slang for slick criminals) who caused the mess, while union leaders and politicians raised cheers by bashing the rich. In his keynote speech, Brown talked of a new era that demands heavier regulation.