The answer is London, Switzerland and to some extent, even Germany. It is astonishing that over the same period, the UK’s surplus went from $7.6 billion to $25.3 billion. And Switzerland, the world leader for offshore finance, nearly doubled from $6.6 to $11 billion.
There is tremendous competition for financial services and America – as a domicile – is not winning. Take initial public offerings for example. 10 years ago, it was all the rage for companies to list on Nasdaq. Today, some of those same foreign companies are delisting themselves, finding the quarterly reporting requirements amid other costs, just too onerous. According to a report commissioned by the London Stock Exchange, The Cost of Capital: An International Comparison, in 2005, the European exchanges raised more new money from IPOs and attracted more international IPOs than the US exchanges.
It is particularly prevalent amongst smaller companies. Underwriting fees in Europe at 3-4% are half what they are in the USA. The clear winner though has been London’s junior market, the Alternative Investment Market or AIM. This accounted for 52% of Europe’s IPOs last year. AIM is winning the business because it does not require that a company have any minimum market capitalization, stockholders’ equity, trading volume or share price. Add to that for small to mid-cap IPOs in the $20 to $100 million range – getting analyst coverage is perceived to be easier in London than in New York. So for London at least, small has become the new big.
IPOs may well be the headline grabbing business, but now there are new markets like credit derivatives that have come from nowhere to a notional $7.5 trillion in just 10 years. Derivatives were invented by the Mesopotamians thousands of years ago. But in the 19th Century, Chicago led the way with its futures markets for grain and pork bellies. This has not been since translated into a comparative advantage in derivatives – made ever more complex with the help of computer modelling. London now has 40% of the world derivatives market.
The underlying lesson is that capital is moving faster and more efficiently than ever before. If higher returns can be found out of America or indeed anywhere else there are no real barriers to its reallocation. So perhaps that’s why Hank Paulson is dropping strong hints that he is in favour of reform of the Sarbanes Oxley Act.It is pricing American markets out of a future that used to be theirs. No question, America’s financial regulation has become a burden. And only competition in the form of globalisation is forcing Americans to confront this reality.
Global financial innovation and competition have only just got going. And not even America can afford to rest on her laurels.