Out of Crisis Comes Opportunity
Pulitzer Prize-winning author Thomas Friedman recently summed up the current state of affairs by saying, “Americans own
assets all over the world; foreigners have long owned substantial positions in U.S. companies. That’s globalization — and now you are going to see globalization and financial integration on steroids.”
The unprecedented leveraging in the global capital markets took place over a number of years, but it has all come apart in a very short period of time. U.S. and global equity markets have fallen from all-time highs, reached in the summer of 2007, to, in the fall of 2008, levels not seen since 1999. The liquidity that facilitates the smooth functioning of credit markets has all but dried up, and the U.S. government has taken the dramatic step of enacting a $700 billion rescue effort in order to try to restore functionality to lending markets, whose viability has a direct impact on the real economy and the lives of ordinary citizens.
In the thick of the storm, with stock markets falling by 5 percent one day and lurching upwards by the same amount the next, it is hard to see what the landscape will look like once the tumult has died down. Whatever it is, it will present both challenges and opportunities to its participants. As Thomas Friedman noted in the above-referenced quote, the global capital that flows between the world’s borrowers and its savers inextricably binds them both together in an increasingly integrated financial system. International financial centers with a close geographic proximity to repositories of excess savings will have an important role to play in this emerging order — Asian centers such as Hong Kong, Singapore, Mumbai and Labuan (Malaysia) come to mind, as do emerging Gulf States destinations for financial services, such as Bahrain, Dubai and Qatar.
What could the role of these financial centers look like? The old adage in understanding the flow and mechanics of international finance is “follow the money.” As Wall Street and the City of London shed jobs and 100-year-old institutions close up shop, that is just what a new generation of aspiring financiers — Wharton, Harvard and INSEAD graduates with MBAs in hand — are likely to be doing. If the money resides in the coffers of central banks and sovereign wealth funds in Asia, the Gulf States and elsewhere, then the talent will follow.
But it is not merely as simple as that. For it is not just jobs that are being lost on Wall Street and in the City, but an entire career concept — the shining cities teeming with elite Masters (and Mistresses) of the Universe that have captivated the imaginations of smart young graduates since the early 1980s, the corporate finance, mergers and acquisitions, derivatives trading, private equity, and hedge fund management. The world may have changed on this new generation, but their ambitions have not diminished as a result. An infusion of top-quality talent may be ready to take up residence in any up-and-coming international financial center that is ready to accept them.
This poses a challenge to the financial centers. Top-quality talent is something that is hard to attract, but harder still to hold onto. The international financial centers that truly aspire to rise to the top will need to set out ambitious plans for growth and improvement and then follow through on the strategy. A good place to start would be benchmarking progress against the competitive categories used by the City of London’s Global Financial Center Index to rate international financial centers: people, business environment, market access, infrastructure, and general competitiveness. Initiatives like the Qatar Foundation for Education, Science and Community — formed in 1995 to support world class educational opportunities, economic diversification, and leading edge research and development — illustrate the ways in which international financial centers can take active steps to position their services at the forefront of the emerging financial landscape.
In financial markets, various products and services at different times come in and out of favor, posing risks for financial centers that stake their future on the expert provision of narrowly defined niche services. The best of these niche providers has the foresight to plan ahead and ensure that their areas of expertise remain competitive in a changing landscape. For example, Bermuda has long been known as a leading global specialist in the provision of insurance and reinsurance services, and dominates the worldwide captive industry. In the past several years, however, Bermuda has also gained a strong reputation as a preferred provider of hedge funds-related services — a business that has grown enormously over the course of this decade. As financial markets pick up the debris from the leverage implosion that has taken place over the past twelve months, no doubt new types of services and products will emerge as important linchpins in a new environment. International financial centers that can translate new trends into practical, high-quality service offerings will be able to secure a competitive advantage. Of course if that were an easy proposition, then everyone would do it. The rewards will go to the few who do it differently and do it better.