from Follow the Money

New York, not necessarily the world’s leading financial center

November 27, 2006

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Lots of folks on Wall Street think they know why New York doesn’t dominate the IPO league tables anymore.   Sarbox.   It is undermining the “competitiveness” of US capital markets.   Or so the argument goes. 

I am a bit suspicious.   Sarbox may be driving some business abroad. But lots of folks on the Street never liked Sarbox to begin with, and are more than willing to blame Sarbox for a lot of other trends.  

John Gapper highlights four potential reasons why lots of IPOs are now being done outside of New York.

1.   The big money is no longer just in the US.  

The biggest foreign companies used to come to Wall Street because that was where the money was. They could tap into the US institutional and retail savings pool, and gain the attention of many New York-based hedge funds, only by obtaining a listing on the NYSE or Nasdaq … This is no longer true. More money is managed in other financial centres, particularly London.

2. US investors are now quite comfortable buying the stock of firms listed on foreign markets.   Just look at comparative returns on US and non-US equities.

3. Wall Street has exported its “technology” to the rest of the world, so I-bankers in London (and Hong Kong) now deliver much the same product as I-bankers in New York.

4.  New York firms are trying to charge more than the IPO market will bear.    

London has been able to pick the best aspects of US practice and discard others. Underwriting fees for international IPOs remain much lower in London: they average 3.5 per cent on the LSE, compared with 7 per cent on Nasdaq and 5.6 per cent on the NYSE, according to Oxera. 

I would add three more.

1. The US doesn’t have big state owned firms to privatize.   China does.   And China clearly doesn’t need to list its banks in New York to attract plenty of interest from US fund managers.  US firms are so eager to invest in China that that they are, in general, willing to accept China’s terms. 

2. The US doesn’t have any spare saving to invest in the rest of the world.  It is a net borrower to the tune of $900b.   Sure, the existing stock of US financial assets is huge, and convincing US investors to shift a bit of that stock into a new issue is one way to raise money.  But right now, the big pools of savings – at least savings from current income – are found in the world’s oil exporters, in China and in Japan.   The US, in some sense, is looking to raise money from the rest of the world.   That means that foreigners looking to raise money won’t necessarily knock on the United States door.   Rather, they will try to convince the oil exporters and Asian savers to invest in their firms rather than buy yet more US debt.

3. New York is in the wrong time zone to intermediate Asian, Russian and Middle Eastern savings.   Even if it was easier to get in and out of the US – and even if JFK was a modern, efficient airport connected seamlessly to downtown Manhattan – New York is still asleep when China and the Middle East are awake.    Hong Kong and London are not.   Sometimes, geography is destiny.

New York still dominates the business of repacking US mortgages into securities that appeal to Asian central banks.    And it probably will for a long-time.   But New York may have to work harder to keep its current position in other lines of international financial business.  It isn’t the only game in town.

The US doesn’t (yet) have the mentality of a debtor that has to scour the world to attract the funds it needs to cover its big deficits.   It still has the mentality of a creditor country, one that has the savings other countries need to develop.   But that isn’t the case any more.

I think Gillian Tett is on to something important.   She write specifically about Lone Star’s difficulties in Korea – and Lone Star’s implicit assumption that it knows what should happen in Korea better than the Koreans.   

For what buy-out firms are doing in places such as South Korea is not just implementing corporate restructurings. They are taking calculated bets about how the political and regulatory system will develop, often when this system is in flux …

For buy-out participants generally operate in a milieu where the US way of capitalism is considered self-evidently right. Moreover, these American men - for they are mostly men and often American - usually assume that the rest of the world should become capitalist too.  … Many economists would argue that this mindset is perfectly valid. Perhaps so.  … But in practical terms it makes it hard for private equity players to show humility, or understand cultural risk.

But her basic insight seem more broadly applicable.   US financial market participants  have long assumed that the other financial markets will evolve over time to mirror US markets – and that US rules will become global rules, with a lag.

Those assumptions may need to be reevaluated.    Debtors do not usually set the rules of the (financial) game. 

There is a deep reason why the dollar bonds of Chinese state banks trade a lower spread that the bonds of private US banks – and Chinese state banks presumably could raise long-term funds more cheaply than private US banks  …

Remember, the US isn’t financing its US equity investment abroad with its own savings.  It is financing both new investment in the US and equity investment abroad with savings borrowed from the rest of the world.   Over time, that may change the rules of global finance in ways that the US doesn’t expect.  

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