Santa Barbarian at the Gate

Musings on a barbarian's interests

Innovation on Wall St.

The weekend’s financial and popular press was rife with it: “Soros sees no bottom for world financial ‘collapse'” screamed one Reuters’ headline that received wide syndication.  But the NYTimes counterposed that the creation of new markets may stem this tide — and a bit shamelessly, I might add, plugged my employer:

“In the weeks after the Lehman Brothers investment bank collapsed last fall, Robert C. Lieber, the deputy mayor for economic development, was predicting that Wall Street would confound doomsayers by bouncing back faster than expected and reaffirm New York as the financial capital of the world.

Last week, Mr. Lieber and his colleagues at City Hall sounded a very different tune: most of the financial jobs lost in this crisis, they predicted, would not be regained in the next several years — if ever.

“We’re not looking to recreate what was here before,” Mr. Lieber said. “We’re acknowledging the changes and looking to diversify within financial services and outside financial services.”

That admission, as much as any other, highlights just how significantly the thinking about Wall Street has changed in a matter of months.

Early last year, city officials were still fretting about the rise of London’s financial industry and the competitive threat it posed to New York. Now they are worried about filling a huge hole in the city’s economy while trying to retain thousands of laid-off financiers before they scatter across the globe.

They now forecast that the financial services sector that powered the city’s prosperity will shed 65,000 jobs as a result of the financial crisis. Almost half of them will come from the highest-paying pursuits like investment banking and the sales and trading of stocks and bonds, according to an analysis the city commissioned from the Boston Consulting Group.

The study concluded that what remained of the sector would be far less profitable than it was. In 2007, its $70 billion profit amounted to about 22 percent of its revenue, the study found. But it concluded that that profit margin could decline by half or even three-quarters before it started to grow again. The speed and depth of the reversal of Wall Street’s fortunes have shaken the faith of city officials in the staying power of the biggest corporate employers and driven a rapid overhaul of their economic development policies. No longer can they count on the financial sector to supply one-third or more of all the compensation paid out in the city, as it did in 2007, or to fill the coffers of the city and state governments with tax revenue.

Mayor Michael R. Bloomberg’s news conference last week in a converted warehouse near the Holland Tunnel revealed a stark turnabout in his administration’s approach.

It had been only four years since Mr. Bloomberg piled up more than $100 million in incentives to persuade Goldman Sachs, one of the world’s most profitable companies, to build a 43-story headquarters near the site of the destroyed World Trade Center. That building, still under construction, was designed to have hangar-size spaces where hundreds of traders could buy and sell all sorts of high-risk securities. Trading floors like those were supposed to help set New York apart from its rivals.

But last week, Mr. Bloomberg laid out a very different vision of the city’s future. Standing in a large, empty space a mile north of the financial district, he pinned hopes for a financial revival on businesses of a different scale: start-ups conceived and managed by the defrocked wizards of Wall Street.

Rather than write them off as losers in the casinos of capitalism, city officials are encouraging them to start over, the Silicon Valley way. As part of a $45 million program, the city will subsidize garage-size offices as hatcheries for their most promising ideas for new businesses in finance or other fields.

“This represents a fundamental shift in public policy,” said Kathryn S. Wylde, the president of the Partnership for New York City, a group that represents the interests of big corporations. That shift, she said, accelerated rapidly last fall as it became clear that the big firms that had been the pillars of economic growth would be shrinking and recasting themselves for years to come.

“When the financial crisis started to hit and we began to get the first information about the potential losses of jobs and revenue, I think that made the conversation about how does the industry change,” Ms. Wylde said. “One of the things we were interested in changing was the global image of New York as a center that welcomes entrepreneurs and that we won’t cede that position to Beijing or London or M.I.T.,” she said, referring to the Massachusetts Institute of Technology.

Or Chicago. One new focus of city officials’ attention is maintaining and developing financial exchanges and other infrastructure for the sector. Among the current concerns is catching up to the Chicago Climate Exchange, which is trying to establish itself as the hub for the trading of greenhouse gas emission credits. The New York Mercantile Exchange started trading a few environmental securities last year as a prelude to what it calls the Green Exchange.

The Green Exchange employs only a few people so far and all of the trading on it is expected to be conducted electronically, said a spokesman for CME Group, which owns it. But city officials are more interested in the cachet and magnetism of being the home of what could be the next big thing in trading and finance.

That is why Mr. Bloomberg introduced Barry E. Silbert at a news conference last week. Mr. Silbert, a former investment banker, is the founder and chief executive of SecondMarket, a five-year-old company that creates markets for trading of obscure securities and assets, including claims against Lehman Brothers in bankruptcy court.

Mr. Silbert’s company may never replace more than a handful of the tens of thousands of jobs lost in this downturn, but his attitude about the possibilities is what city officials want to capture and spread.

“Why start a company here?” Mr. Silbert said. “Aside from the robust infrastructure, entrepreneurs come to New York for its most abundant resource: smart, ambitious, innovative people.

“The next chapter in the history of Wall Street is being written right now,” he said. “Never has there been a need for such a cultural and intellectual shift in thinking on Wall Street.”’

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One comment on “Innovation on Wall St.

  1. jake raden
    February 24, 2009

    *Yawn*

    new york was surpassed in brilliance and creativity by silicon valley a long time ago. probably right around the time it became saturated with the idiots who destroyed the financial world in the last 10 years.

    i sure hope secondmarket wasnt using gaussian cupolas to help price/risk assess these “obscure securities and markets” it plans to sell. smells fishy to me.

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This entry was posted on February 23, 2009 by in Economics, General Business, SecondMarket.
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