Sustaining New York’s and the US’ Global Financial Services Leadership doc

The Unted States: A domnant force n global financal servces 31SEctiON ii ExtErNaL FOrcES UNdErmiNiNG thE NatiON’S aNd NEw YOrk’S FiNaNciaL A.. Secton II analyzes the extrnsc nternatona

Sustaining New York’s and the US’ Global Financial Services Leadership

Dear Fellow Americans,

The 20th Century was the American century in no small part because of our economic dominance

in the financial services industry, which has always been centered in New York Today, Wall Street

is booming, and our nation’s short-term economic outlook is strong But to maintain our success over the long run, we must address a real and growing concern: in today’s ultra-competitive global marketplace, more and more nations are challenging our position as the world’s financial capital

Traditionally, London was our chief competitor in the financial services industry But as technology has virtually eliminated barriers to the flow of capital, it now freely flows to the most efficient markets, in all corners of the globe Today, in addition to London, we’re increasingly competing with cities like Dubai, Hong Kong, and Tokyo

The good news is that we’re still in the lead Our financial markets generate more revenue than any other nation, and we continue to be home to the world’s leading companies, which help form the backbone of our national economy In fact, for every 100 Americans, five work in financial services – and these jobs are not just in New York and Chicago In states as diverse

as Connecticut, Delaware, South Dakota and North Carolina, the financial services industry employs major portions of the workforce

All Americans have a vested interest in strengthening America’s financial services industry, and the time has come to rally support for this effort To stay ahead of our hard-charging and dynamic international competitors, and to ensure our nation’s long-term economic strength,

we can no longer take our preeminence in the financial services industry for granted In fact, the report contains a chilling fact that if we do nothing, within ten years while we will remain a leading regional financial center; we will no longer be the financial capital of the world We must take a cold, hard look at the industry, identifying our weaknesses, learning from the best practices

of other nations, and drawing upon strategies that will allow us to adapt to the changing realities

of the market That is exactly why we commissioned this report

The report provides detailed analyses of market conditions here and abroad, informed by interviews with more than 50 respected leaders drawn from the financial services industry, consumer groups, and other stakeholders The findings are quite clear: First, our regulatory framework is a thicket

of complicated rules, rather than a streamlined set of commonly understood principles, as is the case in the United Kingdom and elsewhere The flawed implementation of the 2002 Sarbanes-Oxley Act (SOX), which produced far heavier costs than expected, has only aggravated the situation, as has the continued requirement that foreign companies conform to U.S accounting standards rather than the widely accepted – many would say superior – international standards The time has come not only to re-examine implementation of SOX, but also to undertake broader reforms, using a principles based approach to eliminate duplication and inefficiencies

in our regulatory system And we must do both while ensuring that we maintain our strong protections for investors and consumers

Second, the legal environments in other nations, including Great Britain, far more effectively discourage frivolous litigation While nobody should attempt to discourage suits with merit, the prevalence of meritless securities lawsuits and settlements in the U.S has driven up the apparent and actual cost of business – and driven away potential investors In addition, the highly complex and fragmented nature of our legal system has led to a perception that penalties are arbitrary and unfair, a reputation that may be overblown, but nonetheless diminishes our attractiveness to international companies To address this, we must consider legal reforms that will reduce spurious and meritless litigation and eliminate the perception of arbitrary justice, without eliminating meritorious actions

Third, and finally, a highly skilled workforce is essential for the U.S to remain dominant in financial services Although New York is superior in terms of availability of talent, we are at risk of falling behind in attracting qualified American and foreign workers While we undertake education reforms to address the fact that fewer American students are graduating with the deep quantitative skills necessary to drive innovation in financial services, we must also address U.S immigration restrictions, which are shutting out highly-skilled workers who are ready to work but increasingly find other markets more inviting The European Union’s free movement of people, for instance, is attracting more and more talented people to their financial centers, particularly London The United States has always been a beacon for the world’s best and brightest But to compete with the growing EU and Asian markets—in a way that grows our economy and creates jobs across the nation—we must ensure that we make it easier for talented people to move to the U.S to pursue education and employment

We know that addressing these challenges, and ensuring that we do so in a way that continues

to offer strong protections to consumers and investors, will not be easy But other nations have succeeded in this effort, and so too must we The industry will continue to experience rapid growth in the 21st Century, which holds great promise for our nation – but only if we take seriously our competitors, who are rapidly gaining ground Failing to do so would be devastating both for New York City and the entire nation

In the weeks and months ahead, we will work together to implement the state and local reforms necessary to strengthen New York City’s position as the world’s financial capital At the same time, we will work with Congress, the Administration, regulators industry leaders, and other stakeholders to take the necessary steps to ensure that America retains its dominant position in the financial services industry in the 21st Century It is our hope that this report will call attention

to the challenges we face in meeting this goal, and serve as a call to action for members of both political parties, and for leaders of every branch of government

Sincerely,

A The Unted States: A domnant force n global financal servces 31

SEctiON ii

ExtErNaL FOrcES UNdErmiNiNG thE NatiON’S aNd NEw YOrk’S FiNaNciaL

A Strong dynamcs outsde the US drvng nternatonal growth 39

C Competton ntensfyng n two key markets: dervatves and debt 54Contents

SEctiON iii

dOmEStic drivErS OF cOmpEtitivENESS that pOLicYmakErS

A Fnancal servces leaders perceve New York Cty as weakenng 61

C A legal envronment seen as expensve and unpredctable 73

D Recent US regulatory trends damagng compettveness 78

SEctiON iv

rEcOmmENdatiONS tO SUStaiN thE NatiON’S aNd NEw YOrk’S

D New York agenda to promote financal servces compettveness 118

n

Gven the mportance of the Unted States’ financal markets to the natonal economy, ther compettveness has become a crtcal ssue that merts a promnent place n the natonal polcy agenda US Treasury Secretary Henry M Paulson focused on ths

ssue n a recent speech, descrbng the US captal markets as the “lfeblood of our economy.”1 Wth financal servces representng 8 percent of US GDP and more than

5 percent of all US jobs,3 the sector s too bg and mportant to take for granted New York Cty Mayor Mchael R Bloomberg and US Senator Charles E Schumer also recently spoke out on the need for greater balance between nnovaton and regulaton, statng, “Unless we mprove our corporate clmate, we rsk allowng New York to lose

ts preemnence n the global financal servces sector Ths would be devastatng for both our Cty and naton.”4 The most pressng ssues affectng New York’s leadershp

as a global financal hub, ncludng regulaton, enforcement, and ltgaton, are natonal

ssues that affect other US financal centers as well

In ths context, Mayor Bloomberg and Senator Schumer asked McKnsey & Company to work wth the New York Cty Economc Development Corporaton (NYCEDC) to develop

a better understandng of the contrbuton that strong, nnovatve financal markets can make to a vbrant economy The Mayor and the Senator sought a comprehensve perspectve on the compettveness of the overall US financal servces sector, wth partcular emphass on New York’s contrbuton Whle ths report consders a broad definton of financal servces – ncludng retal and corporate bankng, securtes, and nsurance – n understandng the sector’s mportance to the US and New York economes, t focuses prmarly on US compettveness n the securtes and nvestment bankng sectors, where competton among global financal centers s most ntense and where New York has the most at stake

1

Executve Summary

To brng a fresh perspectve to ths topc, a McKnsey team personally ntervewed more than 50 financal servces ndustry CEOs and busness leaders The team also captured the vews of more than 30 other leadng financal servces CEOs through a survey and those of more than 75 addtonal global financal servces senor executves through

a separate on-lne survey To balance ths busness perspectve wth that of other consttuences, the team ntervewed numerous representatves of leadng nvestor, labor, and consumer groups McKnsey also ntervewed and, n some cases, worked wth leaders and other subject matter experts n the regulatory, legal, and accountng professons McKnsey complemented ths prmary research wth ts own financal servces ndustry knowledge base, as well as secondary research nto topcs ncludng

nvestment bankng, employment, mmgraton, ltgaton and regulaton

The followng report, Sustaining New York’s and the US’ Global Financial Services Leadership, s based on ths research It proposes recommendatons, ntended for

polcy makers and all nterested partes, that strve to ensure the future compettveness

of US and New York financal servces Ths report, whch touches on a broad range of legal, regulatory, accountng, and other ssues, was developed wthn a short tmeframe and does not purport to provde a comprehensve macro-economc analyss nor a thorough consderaton of every relevant ssue As such, these recommendatons should be vewed as a startng pont for further reflecton and debate by partes

nterested n enhancng the value of US financal servces to all stakeholders Other groups, ncludng the Commttee on Captal Markets Regulaton and the bpartsan Commsson on Regulaton of US Captal Markets n the 1st Century, are also currently studyng ssues related to financal servces compettveness Ther findngs and recommendatons should help further nform the debate and serve to clarfy and refine the recommendatons n ths report, whch are by necessty lmted n ther level

of specficty

After ths Executve Summary, the report contans four sectons Secton I demonstrates why financal servces leadershp s an economc prorty for the US, New York, and several other mportant US financal centers Secton II analyzes the extrnsc

nternatonal trends that are stmulatng the rse of other financal servces centers and clearly defines where the problem les for both the Unted States n general and for New York Cty n partcular Secton III evaluates crtcal ntrnsc factors for global financal servces compettveness, ncludng how the Unted States s jeopardzng ts lead n talent and fallng behnd n legal and regulatory compettveness Fnally, Secton

IV proposes an ntegrated set of recommendatons that holds the potental to address

GLObaL FiNaNciaL SErvicES LEadErShip: a NatiONaL priOritY

Leadershp n global fi nancal servces s vtally mportant to the Unted States as a whole, as well as to the Cty and State of New York Leadershp n ths large, hgh-growth sector translates nto substantal economc actvty, drect and ndrect job creaton, and tax revenues for the US, New York, and other fi nancal servces centers around the country Further, because fi nancal nsttutons provde nvaluable ntermedaton and facltaton servces to all busnesses, a strong fi nancal servces sector s crtcal to the health of the overall economy

The US fi nancal markets, wth New York at the center, are stll the world’s largest and are among the most mportant by many measures The Unted States s home to more

of the world’s top fi nancal servces nsttutons than any other country: sx of the top ten fi nancal nsttutons by market captalzaton are based n the New York area, and US-based fi rms stll head the global nvestment bankng revenue rankngs In terms

of global fi nancal stock,5 the Unted States remans the largest market, well ahead of Europe, Japan, and the rest of Asa (Exhbt 1), although the fi nancal stock n other

5

$13

$20

Japan 30

8

Europe

US FINANCIAL STOCK SIGNIFICANTLY LARGER THAN OTHER REGIONS,

BUT GROWTH RATE IS LOWER

$ Trillions, 2005, Percent

Source: McKinsey Global Institute; Global Insight

$38

Non-Japan Asia-Pacific

$51

US

UK Eurozone

regons s now growng faster than t s n the Unted States The US generates more revenues from financal servces than any other regon but, once agan, the rest of the world s challengng that leadershp n the hotly contested nvestment bankng and sales and tradng markets Fnally, as cross-border captal flows have accelerated, the Unted States, along wth the Unted Kngdom, has benefited dsproportonately.

Fnancal servces s the thrd-largest sector of the US economy, contrbutng 8 percent

of GDP – only manufacturng and real estate are more sgnficant Fnancal servces

s also among the three fastest-growng sectors wth an average annual growth rate

of 5 percent over the past decade, compared to a 3. percent average growth rate for the economy as a whole Seven states, ncludng New York (as well as Connectcut, Delaware, Massachusetts, North Carolna, Rhode Island, and South Dakota) count

on financal servces for 10 percent or more of ther real gross product In terms of employment, 1 n every 19 jobs n the country s n financal servces In states as dverse as Connectcut, Delaware, and South Dakota, financal sector employment accounts for 8 to 10 percent of non-farm prvate sector jobs

The sector s partcularly mportant to New York Cty, where t represents 15 percent

of the gross cty product (GCP), second only to real estate It s also the Cty’s growng sector, wth average annual GCP growth of 6.6 percent6 from 1995 to 005, compared wth the Cty’s overall growth rate of 3.6 percent Fnancal servces are a vtal component of the Cty’s tax base, contrbutng over a thrd of busness ncome tax revenues One n every nne jobs n New York Cty s n the financal servces ndustry and, accordng to a recent study by the New York State Comptroller, every securtes job accounts for two addtonal jobs n other ndustres, n partcular n retal and professonal servces

fastest-ExtErNaL FOrcES UNdErmiNiNG thE NatiON’S aNd NEw YOrk’S

FiNaNciaL SErvicES prEEmiNENcE

The threat to US and New York global financal servces leadershp s real: n the hghly lucratve nvestment bankng and sales and tradng busnesses, European revenues are now nearly equal to those n the US (Exhbt ) It s clear that the country and the Cty need to take ths threat serously In so dong, t s crucal to separate the effects

of the natural maturng of foregn markets, whch s an extrnsc phenomenon beyond the control of US polcy makers, from the more ntrnscally sourced practces and condtons that make the US and New York less compettve, and whch are well wthn

At some level, t s nevtable that other natonal markets wll become more attractve

to ndustry partcpants as they grow faster than those n the US, albet from a smaller base Both European and Asan captal markets (.e., the outstandng stock of equtes and debt nstruments) are smaller as a percentage of total fi nancal stock and GDP than those n the Unted States, mplyng that these markets have more room to expand Contnued economc lberalzaton and the ntroducton of new market-orented regulatons are workng to stmulate ths growth Moreover, technology, tradng markets, and communcaton nfrastructures are evolvng to make real-tme nteractons and transactons possble and affordable from vrtually anywhere, thus reducng some of the benefi ts of physcal co-locaton n major fi nancal centers such as New York

However, n lookng at several of the crtcal contested nvestment bankng and sales and tradng markets – ntal publc offerngs (IPOs), over-the-counter (OTC) dervatves, and debt – t s clear that the declnng poston of the US goes beyond ths natural market evoluton to more controllable, ntrnsc ssues of US compettveness As market effectveness, lqudty and safety become more prevalent n the world’s

fi nancal markets, the compettve arena for fi nancal servces s shftng toward a new

69 40

US

74 24

EUROPE’S INVESTMENT BANKING AND SALES & TRADING REVENUES

NOW NEARLY EQUAL TO US

Investment Banking and Sales & Trading Revenues, $ Billions, 2005

Source: McKinsey Corporate and Investment Banking Revenues Survey

$98

$109

EU 15 + Switzerland

30 7

Asia

$37 Sales & Trading

Investment Banking

Exhibit 2

set of factors – lke avalablty of sklled people and a balanced and effectve legal and regulatory envronment – where the US s movng n the wrong drecton.

The choce of venue for IPOs offers the most dramatc llustraton of the nterplay between these factors The world’s corporatons no longer turn prmarly to stock exchanges n the Unted States, such as the NYSE or NASDAQ, to rase captal

nternatonally Over the first ten months of 006, US exchanges attracted barely thrd of the share of IPOs measured by market value that they captured back n 001, whle European exchanges ncreased market share by 30 percent and Asan exchanges doubled ther share In part, ths s because more European and Asan markets are now deep enough to meet large companes’ captal needs locally However, New York’s declne n nternatonal captal rasng s also due to non-US ssuers’ concerns about complance wth Sarbanes-Oxley Secton 404 and operatng n what they see as a complex and unpredctable legal and regulatory envronment The IPO market offers other examples of jursdctonal arbtrage workng aganst the Unted States, wth very small-cap companes n the US ncreasngly favorng London’s Alternatve Investment Market (AIM) over NASDAQ and Amercan prvate equty firms choosng to lst on European exchanges

one-Whle US-headquartered financal nsttutons do not feel the brunt of ths relatve declne n the preemnence of Amerca’s equty captal markets, due to ther ncreasngly

nternatonal stature and ablty to compete aganst local financal nsttutons on transactons takng place n foregn markets, ths trend s nevertheless sgnficant because t entals a net loss of jobs and ndrect revenues As the nternatonal

mportance of Amerca’s captal markets recedes and the naton’s leadng financal

nsttutons come to derve an ncreasng share of ther revenues from foregn operatons, more and more hgh value-added financal servces jobs are lkely to move abroad Anecdotal evdence confirms that ths shft s already under way The trend

n the equty captal markets s thus partcularly worrsome not only because of the sgnficant lnkages that exst between IPOs and other parts of the financal servces economy, but also because of the mportance of financal servces jobs to the US, New York, and other leadng US financal centers n terms of both drect and ndrect employment, as well as ncome and consumpton tax revenues

The rapdly growng dervatves market s another area where the US finds tself n

a heated contest wth nternatonal compettors Whle Chcago leads n traded dervatves, Europe – and London n partcular – s already ahead of the US

and New York n OTC dervatves, whch drve broader tradng flows and help foster the knd of contnuous nnovaton that contrbutes heavly to financal servces leadershp Europe has a 56 percent share of the $5 bllon global revenue pool from dervatves;

t has a 60 percent or greater share of revenues n nterest rate, foregn exchange, equty and fund-lnked dervatves (the US leads only n commodty dervatves) Many

of these busnesses grew from nothng n the past 5 to 10 years and could be located anywhere “The US s runnng the rsk of beng margnalzed” n dervatves, to quote one busness leader, because of ts busness clmate, not ts locaton The more amenable and collaboratve regulatory envronment n London n partcular makes busnesses more comfortable about creatng new dervatve products and structures there than

n the US The more lenent mmgraton envronment n London also makes t easer

to recrut and retan nternatonal professonals wth the requste quanttatve sklls Fnally, the FSA’s greater hstorcal wllngness to net outstandng dervatves postons before applyng captal charges has also yelded a major compettve advantage for London

Whle the US remans the center of nnovaton for leveraged lendng (.e., the lendng

of captal to companes wth a ratng below nvestment-grade) and securtzaton, t s facng challenges to ts leadershp n these markets as well The US controlled over

60 percent of leveraged lendng ssuance by value and approxmately 70 percent of revenues n 005 Amerca’s leadershp n securtzaton s even more strkng, wth the US market representng approxmately 83 percent of global ssuance by value and

87 percent of revenues n 005 However, European lenders are begnnng to embrace US-style credt terms, crtcal to the leveraged lendng and sub-prme consumer finance markets Ths should poston Europe to enjoy explosve securtzaton growth n the near future, smlar to what occurred n the US over the past decade Further, European control of the credt dervatves markets s begnnng to shape and drve the structure

of the underlyng cash lendng markets Whereas hstorcally US markets and financal

nsttutons often benefited from the ablty to set market standards, ths trend could lead to a deteroraton n US compettveness f markets and nsttutons fal to follow the pace ncreasngly set by ther European compettors

Compoundng matters, US regulators’ proposed amendments to the Basel II standards (.e., the recommendatons agreed upon by numerous nternatonal bank supervsors and central bankers to revse the nternatonal standards for measurng the adequacy of bank captal) could put US banks at a captal dsadvantage relatve

to ther nternatonal compettors Ths could put a brake on US leadershp n these

markets and even reduce the lkelhood that future nnovatons n the credt arena wll occur n the US Fnally, London s transformng tself nto an ncreasngly szeable and attractve talent hub for people wth the knd of structurng and prcng sklls that used

to be avalable only n New York, thereby reducng Amerca’s talent advantage and further ncreasng the lkelhood that tomorrow’s debt nnovatons wll occur n London rather than New York

In short, Amerca’s hstorcal preemnence n financal servces wll face some natural eroson as extrnsc forces prompt foregn markets to grow faster n both establshed products, such as IPOs and tradtonal lendng, and n newer and faster growng areas, such as dervatves and securtzaton Nevertheless, Amerca’s current sze and stature as a financal leader confers upon US markets and nsttutons a number of advantages whch, f properly supported by an efficent and responsve regulatory and legal framework, should allow the US to reman the global financal servces leader of tomorrow However, tme s of the essence for US polcy makers to turn ther attenton

to the factors of compettveness they do control, as the global macroeconomc trends descrbed above are steadly reducng the margn of error that the US hstorcally enjoyed

dOmEStic drivErS OF cOmpEtitivENESS that pOLicYmakErS

caN iNFLUENcE

The atttudes of financal servces leaders n the US and overseas, revealed n ntervews and surveys, further elucdate the thnkng that s shftng globally contestable busness away from US markets Despte postve sentments about New York as a center for financal servces and as a place to work and lve, ntervewees agreed that New York has become less attractve relatve to London over the last three years Lookng ahead

to the next three years, about two-fifths of CEOs surveyed expected that New York Cty would become less attractve as a place to do busness, whereas less than one-fifth felt t would become more attractve absent some nterventon by polcy makers

By contrast, only a few CEOs surveyed expected that London would become less attractve as a place to do busness, but over half expected t would become more attractve Senor executves surveyed had smlar, although less pronounced, vews

Perceptons, of course, are one thng, but these decson-makers’ vews are beng played out n the job market: from 00 to 005, London’s financal servces workforce grew by 4.3 percent, whle New York Cty’s fell by 0.7 percent, a loss of more than

0.3 0.2 0.2 0.1 0.1 0 0 -0.2

-0.2 -0.3 -0.3 -0.5 -0.6 -0.6 -0.6 -0.7 -0.7 -1.1

AMONG HIGH IMPORTANCE FACTORS, NEW YORK EXCELS

IN TALENT BUT UNDERPERFORMS IN LEGAL AND REGULATORY

Performance gap, rating scale

Importance*

High Medium Low

Reasonable Compensation Levels to Attract Quality Professional Workers Close Geographic Proximity to Other Markets Customers and Suppliers

Reasonable Commercial Real Estate Costs Favorable Corporate Tax Regime Openness of Immigration Policy for Students and Skilled Workers

Workday Overlaps with Foreign Markets Suppliers

Openness of Market to Foreign Companies Low Health Care Costs

Deep and Liquid Markets High Quality Transportation Infrastructure

High Quality of Life (Arts, Culture, Education, etc.)

Low All-In Cost to Raise Capital Effective and Efficient National Security Availability and Affordability of Technical and Administrative Personnel

* High importance factors were rated between 5.5-6.0 on a 7-point scale; medium between 5.0-5.4;

low were less than 5.0

Source: McKinsey Financial Services Senior Executive Survey

Government and Regulators are Responsive to Business Needs

Fair and Predictable Legal Environment

Attractive Regulatory Envoronment Availability of Professional Workers

Exhibit 3

Skilled people A hgh-qualty workforce s essental for any financal center, and

financal sector executves rated “talent” (hghly sklled professonal workers) as the most mportant factor among 18 elements that define the success of a financal center They also perceved New York to be superor to London on that measure Accordng to the survey, one reason for New York’s advantage s cost of lvng: respondents consder the two ctes to be neck-and-neck n terms of qualty of lfe, but they see London as markedly more expensve Executves ntervewed for ths report also descrbed a vrtuous crcle effect n New York, whereby nnovatve, dynamc sklled professonals attract others lke them

New York’s lead over London, however, may be under threat The problem facng New York appears to be more structural than cultural US mmgraton polces are makng t harder for non-US ctzens to move to the country for educaton and employment, whch works drectly aganst New York’s compettve advantage The dsparate outcomes resultng from the dscretonary applcaton of rules on vstor vsas, caps on crucal H-1B work vsas, and the lag between exprng student vsas and work vsa start dates are all encouragng talented people from around the world to turn elsewhere for work

By contrast, the free movement of people wthn the European Unon s enablng the best people to concentrate n other financal centers – partcularly London – where

mmgraton practces are more accommodatng

Legal Environment Survey respondents sad that a far and predctable legal

envronment was the second most mportant crteron determnng a financal center’s compettveness In ths regard, they felt that the Unted States was at a compettve dsadvantage to the Unted Kngdom They attrbute ths US dsadvantage to a propensty toward ltgaton and concerns that the US legal envronment s less far and less predctable than the UK envronment Emprcal evdence certanly suggests that ltgaton has become an mportant ssue: 005 set a new hgh for the number

of securtes class-acton settlements n the US, and for the overall value of these settlements Of course, many of these cases addressed the legtmate clams of

nvestors and consumers n stuatons of notable corporate wrongdong However, n aggregate, some of the unque characterstcs of the US legal envronment are drvng growng nternatonal concerns about partcpatng n US financal markets – concerns heghtened by recent cases of perceved extraterrtoral applcaton of US law

of coordnaton and clarty on the ways and means of enforcement have led to a percepton – voced by partcpants n the surveys and ntervews conducted for ths report – that the US system s nether far nor predctable Respondents therefore unformly ndcated an nterest n marryng strong enforcement backed by puntve penaltes for corporate malfeasance wth legal reform that would mprove clarty and predctablty for all partes.

regulatory balance Regulatory responsveness and the overall regulatory

envronment were the thrd and fourth most mportant ssues for survey respondents and ntervewees They ndcated that a very strong regulatory system was vtal n gvng all market partcpants confidence – and that the US clearly enjoys the benefits

of such a system However, the system also needs to adapt as markets and regulated

nsttutons undergo constant change aganst a background of rapd globalzaton Here agan, survey respondents rated the Unted Kngdom more favorably than the Unted States, pontng to regulatory structure and other recent regulatory trends as damagng US compettveness n financal markets

Busness leaders ncreasngly perceve the UK’s sngle, prncples-based financal sector regulator – the Fnancal Servces Authorty (FSA) – as superor to what they see

as a less responsve, complex US system of multple holdng company and ndustry segment regulators at the federal and state levels Regulatory enforcement style also matters, wth the UK’s measured approach to enforcement seen as more results-orented and effectve than a US approach sometmes descrbed as puntve and overly publc Recent US legslatve and regulatory acton, such as the mplementaton

of the 00 Sarbanes-Oxley Act, the proposed US mplementaton of Basel II based captal requrements, and the contnued requrement for foregn companes

rsk-to conform rsk-to US accountng standards, also put the Unted States at a compettve dsadvantage accordng to the senor executves surveyed

rEcOmmENdatiONS tO SUStaiN thE NatiON’S aNd NEw YOrk’S GLObaL FiNaNciaL SErvicES LEadErShip

Ths report outlnes three sets of ntegrated recommendatons, based on the research conducted, that are amed at makng US fi nancal markets more compettve Frst among them are crtcal natonal legal and regulatory prortes that can and should be addressed quckly These recommendatons are already ganng acceptance wth ndustry leaders and polcy makers and, at least n some cases, solutons are forthcomng Second are recommendatons for levelng the compettve playng fi eld between the US and other nternatonal markets, by re-examnng several areas where US standards may be unnecessarly restrctve when compared to nternatonal alternatves Thrd are natonal-level recommendatons amed at sustanng renvgorated US fi nancal market leadershp over the longer term

The report also outlnes a set of specfi c recommendatons for how New York Cty, workng n partnershp wth the prvate sector, can contnue to enhance ts attractve-ness as a center for fi nancal servces

busness actvty These nclude New

York playng a more actve role n the

natonal fi nancal servces agenda

and workng wth other states that

also depend on the sector

In addton to mantanng the safety

and soundness of the fi nancal

sys-tem, a prme consderaton n

draw-ng up these proposals has been to

strke a better balance between

com-petton and nnovaton on the one

hand, and strong fi nancal regulaton

on the other “If Amerca’s markets

aren’t compettve, nvestors lose,”

sad SEC Charman Chrstopher Cox

“If Amerca’s markets are not

trans-parent and open, nvestors lose.”7

Although the compettveness of the

US fi nancal servces ndustry has

declned, any recommendatons to

critically important near-term priorities

1 Provde clearer gudance for

mplementng the Sarbanes-Oxley Act

 Implement securtes ltgaton reform

3 Develop a shared vson for fi nancal servces and a set of supportng regulatory prncples

initiatives to level the playing fi eld

4 Ease restrctons facng sklled non-US professonal workers

5 Recognze IFRS wthout reconclaton and promote the convergence of accountng and audtng standards

6 Protect US global compettveness n

mplementng Basel II

important longer-term national priorities

7 Form a Natonal Commsson on Fnancal Market Compettveness

8 Modernze fi nancal servces charters

NatiONaL aGENda

mprove that poston must preserve the fundamental nvestor protectons that have contrbuted to the US’ global financal servces leadershp “The lesson of compet-tveness s crtcal but let’s not forget the lessons of ntegrty,” commented New York Governor Elot Sptzer whle he was the State’s Attorney General.8 These recommen-datons are meant to encourage regulators, Congress and the executve branch to contnue to use powers already granted when possble, to pass new legslaton when needed, and to work together to lead the world n best practces across all the factors that determne financal servces compettveness

Left unmanaged, today’s trends n the US financal markets could have a sgnficant negatve mpact on the economy: the Unted States would lose substantal market share n nvestment bankng and sales and tradng over the next five years The 004-

05 revenue growth rates for Europe and Asa were approxmately 5 percent and 19 percent, respectvely, compared wth a US growth rate of 6 percent Ths mples a growth rate of 15 percent for the global revenue pool Even f global growth rates slowed

to a more sustanable rate of 8 to 10 percent, the US would stand to lose between 4 and 7 percent market share over the next five years Stoppng ths loss of share would add approxmately $15 bllon to $30 bllon n ncremental financal servces revenues

to the US n 011 alone Assumng a constant relatonshp between revenues and jobs, that would translate nto between 30,000 and 60,000 securtes sector jobs; t would also stmulate ndrect jobs n the other ndustres

Secton IV of ths report outlnes these recommendatons n substantally more detal

A bref summary follows below

critically important near-term national priorities

recommendation 1 – provide clearer guidance for implementing the Oxley act The Securtes and Exchange Commsson (SEC) and the Publc

Sarbanes-Companes Accountng Oversght Board (PCAOB), n consultaton wth busness and publc accountng firms, should follow through on ther recently proposed revsons

to the gudelnes controllng the mplementaton of Secton 404 of the Oxley Act Provded that, upon ther adopton, they afford gudance beyond what

Sarbanes-s currently proposed wth regard to the noton of “materal weakness,” these proposals should ensure that the audt of nternal controls takes a top-down perspectve, s rsk-based, and s focused on the most crtcal ssues The gudance should also enable audtors and management to exercse more judgment and

8

n

emphasze materalty Takng full account of the constructve observatons that wll result from the notce and comment perods to whch both proposals are currently subject, the SEC and PCAOB should seek to mplement the proposed revsons quckly and effectvely, resstng pressure to dlute the recommendatons, as dong

so would severely undermne the proposals’ mportant sgnalng benefits

Dependng on the extent to whch the revsed gudelnes emprcally reduce the partcularly sgnficant complance burden that Sarbanes-Oxley mposes on smaller companes, as explaned n more detal n Recommendaton , the SEC may want to consder gvng such companes the opportunty to “opt out” of the more onerous requrements of Sarbanes-Oxley, provded that ths choce s conspcuously dsclosed

to nvestors The SEC should also consder exemptng foregn companes from certan parts of Sarbanes-Oxley, provded they already comply wth sophstcated, SEC-approved foregn regulators Ths would make US captal markets more attractve to smaller companes and foregn corporatons wthout unduly jeopardzng

nvestor protecton and the qualty of corporate governance It would also address

nternatonal concerns about the extraterrtoral applcaton of US regulatons by showng approprate deference to foregn regulators

These admnstratve measures wll, wthout legslatve change, address the unntended cost of mplementng Sarbanes-Oxley whle mantanng the ntended deterrent to corporate malfeasance They wll at least partally address the concerns of small companes and non-US ssuers regardng the Secton 404 complance costs nvolved n a US lstng Fnally, these measures wll send an

mportant sgnal to the global financal communty that regulators are approprately balancng busness and nvestor nterests

recommendation 2 – implement securities litigation reform The SEC should

make use of ts broad rulemakng and exemptve powers to deter the most problematc securtes-related suts For example, the SEC could nvoke Secton

36 of the Securtes Exchange Act of 1934, whch effectvely allows t to exempt companes from certan onerous regulatons where t deems such exemptons

to be n the publc nterest Wthn the confines of the SEC’s authorty under the

1934 Act, the Commsson therefore could, pursuant to a thorough cost/benefit analyss, choose to: lmt the lablty of foregn companes wth US lstngs to securtes-related damages proportonal to ther degree of exposure to the US markets; mpose a cap on audtors’ damages that would mantan the deterrent n

effect of large financal penaltes whle also reducng the lkelhood of the hghly concentrated US audtng ndustry losng another major player; and gve smaller publc companes the ablty to “opt out” of some portons of Sarbanes-Oxley (although only f they conspcuously dsclose the fact to nvestors and provded that sufficent nvestor-protecton safeguards are otherwse retaned)

The SEC should also leverage the tact nfluence t has over the securtes

ndustry to promote arbtraton as a means of resolvng securtes-related dsputes between publc companes and nvestors Hstorcally, the SEC has been opposed to arbtraton, but reversng ths poston would brng t more n lne wth broader enforcement trends Arbtraton would substantally reduce the costs that companes face n the course of protracted ltgaton and dscovery, t would provde aggreved plantffs wth more tmely and cost-effectve remedes, yet t would not dmnsh the SEC’s ablty to ntate enforcement actons on

nvestors’ behalf

Legslatve reform s also needed to address the long-term, structural problems that underpn the trend toward ncreasng ltgaton n the securtes ndustry Congress should thus consder legslatve means of addressng concerns around the quantty and unpredctablty of ltgaton relatve to other countres Changes to consder could nclude lmtng puntve damages and allowng ltgatng partes n federal securtes actons to appeal nterlocutory (non-final) judgments

mmedately to the Crcut Courts The latter proposal would reduce the overall legal burden on lsted companes by reducng the frequency of settlements based less on the merts of the case than on the prospect of protracted ltgaton

Legslatve and enforcement-level reform wll requre a careful balancng of

nterests: t should seek to elmnate suts filed to place unwarranted pressure

on companes to settle, whle mantanng the ablty of plantffs wth vald clams to recover approprate damages Arguably, the rght reforms, supported

by rgorous cost/benefit analyses, could benefit legtmate plantffs, nvestors, and corporatons alke by provdng greater predctablty and makng better use of judcal resources

recommendation 3 – develop a shared vision for financial services and a set

of supporting regulatory principles Under the leadershp of the Secretary of the

Treasury and the Presdental Workng Group on Fnancal Markets, federal financal n

regulators should work together to develop, agree on, and pursue a shared vson for the mportance and strategc drecton of the financal sector and ts mpact

on global compettveness, nnovaton to meet customer needs, the management

of systemc rsks, the ethcal conduct of busness, the financng of a growng economy, and the creaton of new jobs Ths shared vson should be supported by a common set of prncples for the regulaton and supervson of financal nsttutons operatng n the Unted States These prncples could nclude, for example, cost/benefit analyss, materalty tests, collaboratve rulemakng and enforcement, and

an escalaton process for enforcement matters Each regulator could then use these common prncples to gude future rulemakng and enforcement actons

Several precedents that exst today can serve as startng ponts for a set of new US financal regulatory prncples The UK’s Fnancal Servces Authorty (FSA), for example, operates under sx such prncples for good regulaton based on ts statutory objectves More recently, the Insttute of Internatonal Fnance (IIF) has ssued a complementary set of seven prncples based on ts objectves for economc growth and competton, financal system stablty and securty, and customer safeguards Both the FSA and the IIF also espouse prncples for how prvate sector firms and ther management teams ought to

nteract wth ther regulators

Regardless of the detals of the prncples themselves, a common approach emphaszng collaboraton and the open sharng of nformaton between regulators and regulated enttes would delver more balanced, consstent and predctable outcomes for financal nsttutons, consumers, nvestors and other market partcpants Ths would have the added benefit of allowng regulators to be more emprcally effectve n shapng the actons of market partcpants It would also help non-US corporatons comply wth US regulatons more easly, whch n turn would make the US more appealng as a center for busness operatons

initiatives to level the playing field

recommendation 4 – Ease restrictions facing skilled non-US professional workers Congress should re-examne and elmnate some of the barrers that

deter or prevent sklled foregn professonal workers both from comng to the Unted States to work, and from remanng n the country as part of the workforce Specfic actons, whch may perhaps most effectvely be mplemented as part of n

a comprehensve mmgraton reform package smlar to that ntroduced n the 109th Congress, could nclude rasng the annual cap on H-1B vsas, elmnatng the tme lag between student vsas exprng and the grantng of H-1B vsas, and provdng clearer gudelnes on how to exercse dscreton n grantng busness vstor vsas

Taken together, such reforms to US mmgraton polces would sgnficantly ease the mbalance between supply and demand for talent n the financal servces

ndustry Ths wll allow the Unted States, and specfically New York, to retan

ts poston as the world’s largest pool of financal servces talent, whch n turn makes the Unted States more attractve to both domestc and foregn financal

nsttutons In lght of the postve mpact that a successful, hgh value-added financal servces ndustry creates n terms of attractng other sophstcated busnesses, ths would also renforce New York’s poston as a first-ter global busness hub

recommendation 5 – recognize iFrS without reconciliation and promote the convergence of accounting and auditing standards The SEC should consder

recognzng Internatonal Fnancal Reportng Standards (IFRS) wthout requrng foregn companes lstng n the US to reconcle to US Generally Accepted Accountng Prncples (GAAP) Smlarly, the PCAOB should work wth other natonal and

nternatonal bodes towards a sngle set of global audt standards Meanwhle, the

US Fnancal Accountng Standards Board (FASB) and the Internatonal Accountng Standards Board (IASB) should contnue – and, f possble, accelerate – current efforts towards the convergence of global accountng standards, amng for a “best-of-both” approach that balances materalty wth the need to nform nvestors and other users of publcly reported financal nformaton

The accelerated convergence of two hgh-qualty accountng standards wll reduce regulatory complance costs wthout undermnng nvestor protecton or mparng market nformaton The harmonzaton of audtng rules, provded that better standards wn out, wll smlarly lower audtng costs for most publc companes wthout reducng the qualty of the statements produced

n

recommendation 6 – protect US global competitiveness in implementing the basel ii capital accord US bankng and thrft regulators should contnue to consult

wth the bankng ndustry and subject the Notce of Proposed Rulemakng (NPR)

to further cost/benefit and compettveness analyses US bankng regulators have proposed changes that would result n US banks holdng hgher captal levels than ther non-US peers, whch could put them at a compettve dsadvantage Ideally,

US bankng regulators wll find a mddle road that protects the structural ntegrty

of the US financal system under adverse market condtons whle preservng the global compettveness of ts banks Ths has already taken many years of effort by regulators and financal nsttutons An expedtous mplementaton of these new standards would brng to a close the lengthy debate over the approach employed n the US, and gve greater clarty concernng the future regulatory landscape

A harmonzed, balanced approach could place US bankng nsttutons on a more equal footng wth ther nternatonal compettors n the mportant lendng and fixed

ncome markets It could also make the US more appealng as a place to do busness for foregn financal nsttutons, whch would not then need to adjust ther captal requrements n order to partcpate n the US markets As a result of ths enhanced competton, US corporatons, consumers and nvestors would enjoy greater choce, enhanced protecton and better prcng

important longer-term national priorities to preserve financial services preeminence recommendation 7 – Form an independent, bipartisan National commission on Financial market competitiveness to resolve long-term structural issues Early

n 007, Congress should create a Natonal Commsson on Fnancal Market Compettveness to assess long-term, structural ssues that affect the health, compettveness, and leadershp of US financal markets and ther contrbuton to the natonal economy Guded by an overarchng vson for the future of US financal servces that s consstent wth the regulatory framework proposed n Recommendaton 3, ths Commsson should develop legslatve recommendatons wth thoughtful prvate sector, nvestor, and regulator nput, for a financal regulatory system that s smple, efficent, responsve to the compettve needs of financal nsttutons n servng ther customers, and attentve to the systemc need for a strong, vbrant, well-managed financal sector wth adequate nvestor protectons Potental areas of reform should

nclude broad polcy, legal, regulatory, and enforcement ssues that the Commsson deems mportant to a compettve financal marketplace and the US economy n

n

Among other thngs, ths Commsson should consder regulatory ntegraton

as well as the possblty of a sngle regulator for natonal and global financal servces firms operatng n the Unted States Furthermore, wth due deference to the separaton of powers between executve and judcal enforcement agences, as well as between state and federal officals, the Commsson should also consder reforms that would mprove the consstency and predctablty of enforcement efforts natonwde More generally, the Commsson should revew and make recommendatons on the general strategc drecton of the financal servces

ndustry and the balance of publc-prvate sector cooperaton best able to promote

a vbrant and robust financal servces sector n the context of ncreasng global competton

recommendation 8 – modernize financial services charters Regulators

and Congress should assess and, where approprate, modernze US financal servces charters, holdng company models, and operatng structures (such

as nternatonal bankng facltes under Regulaton K of the Federal Reserve)

to ensure that they are compettve by nternatonal standards Where these charters and models prove to be cumbersome or nflexble, whch would be unsurprsng gven that most have gone wthout scrutny for decades, Congress should enact legslatve changes that can promote responsveness by US financal

nsttutons to a rapdly changng, ncreasngly global compettve envronment One prorty, n the context of enhancng compettveness for the entre financal servces sector and mprovng responsveness and customer servce, should be an optonal federal charter for nsurance, based on market prncples for servng customers Ths revew should nclude full nput from ndustry partcpants, customers, and other nterest groups to ensure a balanced outcome

New York agenda to promote financial services competitiveness

The natonal agenda descrbed above s crtcal to preservng and enhancng New York’s compettveness as a financal servces center The Cty and State of New York have many strengths, and New York Cty contnues to be seen very postvely as a place

to lve and work The qualty of lfe s hgh, crme s low, arts and culture floursh, and traffic s better (at least when compared to London) Nevertheless, focusng on makng New York more lvable s only one part of the equaton The Cty and State can also take an ntegrated set of actons, centered around the creaton of a new publc/prvate n

5

jont venture dedcated to financal servces, to support and complement ths natonal agenda New York has an mportant responsblty to the global financal servces busnesses centered n the area to promote US and New York compettveness, and the jont venture descrbed below should provde local authortes and market partcpants wth an effectve means of dong so

Establish a public/private joint venture with highly visible leaders focused exclusively

on financial services competitiveness.

The Mayor should work wth the busness communty, partcularly the Partnershp for New York Cty, to form a publc/prvate jont venture focused on strengthenng the financal servces compettveness of the Cty, the State, and the naton Ths jont venture should own and execute a Cty- and State-level agenda that balances the objectves of busness compettveness, consumer protecton, and broad economc growth More specfically, ths agenda should nclude:

more actively managing attraction and retention for financial services Although

the Cty and the State of New York already employ sgnficant resources to mantan workng relatonshps wth leadng financal nsttutons, ths nteracton could become more effectve and forward lookng To do so, the financal servces jont venture should seek to mantan an actve dalog wth the State’s top financal servces employers about ther expanson and relocaton agenda It should also develop relatonshps wth a short lst of hgh-prorty financal servces nsttutons that mght consder expandng what s a lmted presence n New York today The jont venture’s leadershp should reach out to corporate decson-makers at the hghest levels and gve them the focused attenton they need as they make decsons of such magntude, brngng n the Mayor, Deputy Mayor, and other hgh-level local and State officals as and when needed

Establishing a world-class center for applied global finance Several New

York-based educatonal nsttutons already provde excellent graduate programs n busness, law, and accountng, but today’s financal nsttutons need graduates wth deep quanttatve sklls to drve nnovaton n hgh-growth, geographcally moble busnesses, partcularly dervatves and securtzaton The financal servces jont venture should take a leadershp role n coordnatng wth financal servces busnesses and local educatonal nsttutons to desgn and finance the n

n

world’s best graduate program n financal engneerng and global captal markets – one that combnes the academc strengths of local nsttutons wth practcal work experence at the leadng financal nsttutons and that focuses on applyng cuttng-edge mathematcs, statstcs and economcs to financal servces

potentially creating a special international financial services zone The publc/

prvate jont venture, workng wth other nterested stakeholders, should nvestgate the potental for further economc development that the creaton of a specal financal servces zone could have The creaton of such a zone could leverage the

nherent compettve advantage that New York’s unparalleled clusterng of financal servces busnesses bestows upon the State to a greater extent than would be possble for any other financal center One possblty for a specal financal servces zone, relyng prmarly on tax ncentves, would be to attract a new cluster

of next-generaton financal servces busnesses and support ndustres Attractng such leadng-edge companes would not only confer a drect benefit upon New York by vrtue of ther nherent economc output, but t would also enhance the sophstcaton of the regon’s overall busness envronment, thereby makng the area as a whole more attractve to the well-establshed, tradtonal financal servces firms that have hstorcally been at the heart of the New York’s economc success Whle dfferental tax treatment s an economc polcy tool that should

be used wth great care and only pursuant to a thorough cost/benefit analyss, ts potental to buld upon New York’s exstng advantages to attract new busnesses should not be overlooked By focusng on foregn firms wthout a sgnficant US presence, as well as on startup firms, the tax ncentves descrbed above can acheve ther purpose wthout materally harmng the nterests of other regons, and should thereby benefit the naton as a whole

A more ambtous alternatve would be for the Cty, n collaboraton wth federal financal regulators, New York State authortes, and Congress, to develop a plot program to expand and adapt the concept of an nternatonal bankng zone, based

n New York, to other financal sectors Ths proposal would use both fiscal and regulatory polces to leverage New York’s exstng financal servces base to attract or recapture busnesses that are currently based abroad Agan, by focusng

on attractng a net nflow of new busnesses to the US, ths proposal holds the potental to generate a net surplus for the naton wthout harmng the economc

nterests of any of ts consttuent States

n

Enhancing New York’s ability to promote its financial services profile and its agenda as a leading financial center New York already engages n a varety of

marketng actvtes to promote the benefits that the Cty and State of New York can delver to the local, natonal and nternatonal busness communty Consderng the ntensty of competton for global financal servces preemnence, however, the financal servces-focused publc/prvate jont venture should complement ongong actvtes by nvestng further n crtcal areas, ncludng prmary research nto financal servces topcs, a fact-based publc relatons campagn, and advocacy at the state and natonal levels

The new jont venture should be managed by a dedcated, full-tme Chef Executve wth sgnficant experence n leadng major financal servces efforts Ths ndvdual would be tasked wth furtherng New York’s local agenda n the most tmely and collaboratve manner possble He or she would manage the jont venture’s strategc and operatonal actvtes, ncludng actng as the hgh-level lason between ndvdual

ndustry partcpants and the Cty or State, as well as beng the drvng force behnd the mplementaton of the jont venture’s broader strategc plan for New York’s financal servces development

To further rase the profile of New York’s financal servces ndustry at the natonal and

nternatonal levels, the jont venture should also be led by a Charman, apponted by the Mayor n consultaton wth financal servces ndustry leaders, who wll act as an ambassador for the area’s financal servces ndustry Ths offical would assume a wder-rangng mandate than the Chef Executve, helpng New York’s financal servces

ndustry communcate ts vson for the regon’s economc future wth a comprehensve and consstent voce that s heard at the natonal and nternatonal levels

Whle the jont venture’s Charman and Chef executve wll prmarly concern themselves wth furtherng a New York-centrc financal servces agenda on the local, regonal, natonal, and nternatonal levels, t s mportant to recognze that New York’s economc nterests n ths regard are largely algned wth those of the broader Tr-State area The jont venture and ts leadershp, along wth the Mayor’s office and other New York governmental authortes, should therefore seek to collaborate wth Connectcut and New Jersey authortes to provde the most effectve advocacy possble for a robust and efficent financal servces ndustry regonally Although some competton wth regard to the attracton and retenton of financal servces busnesses wll always exst between local governments wthn the Tr-State area, the aggregate benefits to n

of the prvate sector Immedate acton by both groups s requred, not just to protect and expand jobs n a vtal ndustry sector, but also to ensure that US financal

nsttutons and markets are postoned compettvely n the future to meet the needs

of all customers and support sustaned growth n the domestc economy

The recommendatons contaned n ths report are a contrbuton to the debate on the future of US financal servces They deserve dscusson and further exploraton,

as do the recommendatons beng offered n other reports and by other nterested stakeholders The Secretary of the Treasury and the varous financal regulators can take some actons now, whle others wll requre legslatve acton by the Admnstraton and Congress workng together n a common, bpartsan effort The prvate and publc sectors – actng through the proposed bpartsan Natonal Commsson on Fnancal Market Compettveness or New York’s new publc/prvate jont venture – should also come together at the natonal, State and Cty levels, to act now on the ssues and economc prortes dentfied by ths report as crucal to the Unted States and New York

As the pace of globalzaton accelerates, a seres of economc, poltcal, cultural, and technologcal changes contnues to ncrease the level of ntegraton and nteracton across geographc borders Wth the cross-border flow of goods, servces, deas, and financal stock growng rapdly, the nternatonal compettveness of all ndustry sectors becomes ever more mportant for countres and regons that want to mantan and grow ther relevance n the larger global communty Lke many other parts of the

US economy, the financal servces sector has become ncreasngly subject to the forces of globalzaton and nternatonal competton Yet because financal nsttutons provde nvaluable ntermedaton and facltaton servces to busnesses throughout the Unted States, a strong financal servces sector s crtcal to the health of the natonal economy as a whole Gven ts domestc and nternatonal mportance, US financal servces leadershp should receve sgnficant attenton from polcy makers

a thE UNitEd StatES: a dOmiNaNt FOrcE iN GLObaL FiNaNciaL SErvicES

The US s undenably one of the world’s leadng financal servces centers Its financal stock and nsurance markets dwarf those of other countres and only the UK rvals t

n terms of cross-border captal flows The US s home to many of the world’s leadng financal servces companes and generates sgnficant revenues for domestc and

nternatonal financal nsttutons

Wth nearly $51 trllon as of 005, US financal stock – ncludng equtes, bonds, loans and deposts – s more than twce that of Japan, the next largest country, whch has just short of $0 trllon n financal stock Combnng the 1 Eurozone countres wth the UK gves Europe $38 trllon n financal stock, but that s stll only about Global financal servces leadershp:

A natonal prorty

three-quarters the sze of US fi nancal stock (Exhbt 4) 9 The US markets are also the most sophstcated: equty and prvate debt are the largest components of fi nancal stock (approxmately 34 percent and 35 percent, respectvely), whle n many less developed markets, bank deposts stll account for the lon’s share

Although growng at a slower pace than other regons, the US, because of ts sgnfi cantly larger fi nancal stock base, wll reman the world’s largest repostory of

fi nancal assets for years to come Nevertheless, t should be ponted out that, at constant exchange rates, the Eurozone, UK and Non-Japan Asa have all enjoyed faster

fi nancal stock growth rates n recent years than the US Whle fi nancal stock grew at 6.5 percent annually between 001 and 005 n the Unted States, the Eurozone grew 6.8 percent annually over the same perod, the UK 8.4 percent, and Non-Japan Asa 15.5 percent (exhbts 4, 5) Very dfferent dynamcs are drvng fi nancal stock growth

n developed and developng countres, as shown by the fact that prvate debt was the

$13

$20

Japan 30

8

Europe

US FINANCIAL STOCK SIGNIFICANTLY LARGER THAN OTHER REGIONS,

BUT GROWTH RATE IS LOWER

$ Trillions, 2005, Percent

Source: McKinsey Global Institute; Global Insight

$38

Non-Japan Asia-Pacific

$51

US

UK Eurozone

man engne for fi nancal stock growth n the US, Eurozone and UK (wth 8.0, 10.3, and 16.0 percent annual growth, respectvely), but growth n Non-Japan Asa was prmarly lnked to strong performance n the equty markets (19.4 percent annual growth).10

Movng from securtes to nsurance, the hstorcally local lfe nsurance and casualty nsurance markets are now nternatonalzng, although not as fast as the securtes ndustry Issuers of lfe nsurance (a market valued at $1.97 trllon n

property-005) are ncreasngly partcpatng n many dfferent natonal markets throughout the world, and nearly all of the world’s leadng lfe nsurance carrers compete globally In the market for non-lfe nsurance (valued at $1.45 trllon globally n 005), the US remans served prmarly by domestc nsurance carrers, although some US carrers are ncreasngly expandng overseas It s worth notng that many non-US carrers have recently wthdrawn captal and capacty from US markets, and n some cases exted

US

Equities

Total financial stock

US FINANCIAL STOCK GROWTH RATE HAS BEEN SLOWER THAN

IN OTHER REGIONS

CAGRs (2001-05), Percent

12.6%

16.0 10.3

8.0

Non-Japan Asia

UK Eurozone

US

19.4%

4.4 2.5 5.2

Non-Japan Asia

UK Eurozone

US

15.5%

8.4 6.8 6.5

* Total financial stock comprises equities, private debt, public debt, and bank deposits

Source: McKinsey Global lnstitute

Exhibit 5

entrely, due to the perceved dfficulty of copng wth the unfamlar US regulatory and legal envronment.11 The most globally compettve nsurance market s the (much smaller) rensurance busness, wth global net rensurance premums amountng to

$149 bllon The US also has the largest share of ths market, although t s less domnant than n non-lfe, wth 4 percent of the global market, or $37 bllon n net premums n 005 Germany follows closely behnd, wth premums of $35 bllon and

a 3 percent share London accounts for 7 percent of the market, whereas Bermuda has recently emerged to capture 11 percent of global premums, or $16 bllon n 005, drven by a more flexble regulatory envronment, tax benefits, and the ease of settng

up nsurance busnesses.1

It should come as no surprse that n a rapdly ntegratng world, cross-border captal flows have accelerated, to the benefit of the US and the UK n partcular In 005, cross-border flows totaled $6. trllon worldwde, up from $1.5 trllon n 1995.13 Captal flows have grown across the board, wth portfolo nvestment flows (equtes and bonds) growng more rapdly than anythng else In 005, total captal flows nto and out of the

US totaled $1.64 trllon, whle the equvalent figure for the UK was $.68 trllon.14

Turnng from captal stocks and flows to captal markets revenue generaton, the concentraton of financal servces ndustry leaders n the US tells a smlar story about the country’s leadershp role The Unted States s home to more of the world’s top financal servces nsttutons than any other country: sx of the top 10 financal

nsttutons by market captalzaton are based n the New York area, wth the other four found n Ednburgh, London, Tokyo, and Zurch Frms headquartered n the Unted States top the league tables n mergers and acqustons, as well as equty and debt captal-rasng US firms accounted for the top five spots n the combned rankngs for captal markets and M&A for US-based companes n 006; they also occuped three of the top five spots for European-based deals n 006 (Exhbt 6).15 Fnally, the revenues generated by nvestment bankng and sales and tradng actvtes are stll larger n the Unted States than anywhere else US revenues totaled $109 bllon (45 percent of the global total) versus Europe’s $98 bllon (40 percent).16

b a vitaL SEctOr at thE hEart OF thE EcONOmY

The financal servces sector s a vtal element of the US economy, and t s of partcular mportance to New York and a number of other states It s a large ndustry, fast-growng, a major contrbutor to the tax base, and a major source of qualty jobs

11

natonwde Ultmately, well-developed and thrvng fi nancal markets contrbute to the naton’s overall prosperty as they provde easy access to low-cost captal and promote economc stablty Gven the sector’s many mportant characterstcs, supportng t must be hgh on the natonal agenda.

Fnancal servces s the thrd-largest sector of the US economy, accountng for approxmately 8 percent of GDP 17 Only manufacturng (14 percent) and real estate (1 percent) are larger Between 1995 and 005, the ndustry grew at a compound annual growth rate of more than 5 percent, makng t one of the three fastest-growng sectors By contrast, manufacturng and real estate grew at around 3 percent and the overall economy posted 3. percent real GDP growth over the same perod.18

Of course, the fi nancal servces sector s even more crtcal to the New York economy than to the country as a whole, although other states are also heavly relant on t The sector represents approxmately 15 percent of real gross product for both New York Cty and New York State.19 Sx other states (Connectcut, Delaware, Massachusetts, North Carolna, Rhode Island, and South Dakota) all count on fi nancal servces for

10 percent or more of ther real gross product.0 In New York Cty, only real estate s larger (17 percent) wth the next-largest sector, professonal servces, accountng for

17

35

US BANKS CONTINUE TO DOMINATE THE US AND EUROPEAN INVESTMENT

BANKING LEAGUE TABLES

2005 league tables for M&A, equity capital markets, and debt capital markets combined

Goldman Sachs

$2.1

$1.3 J.P Morgan

Citigroup

$1.9

$1.1 Morgan Stanley

Merrill Lynch

$1.7

$1.1 UBS

J.P Morgan

$1.7

$1.1 Citigroup

Lehman Brothers

$1.7

Rank 1

2 3

4

5

US-headquartered investment banks

* EMEA: Europe, Middle East and Africa

Source: Dealogic

Exhibit 6

9 percent Fnancal servces s also the Cty’s fastest-growng sector, regsterng 6.6 percent growth from 1995 to 005 compared wth overall growth of 3.6 percent and real estate sector growth of 3.7 percent.1 The financal servces sector s also crtcal

to the local tax base, accountng for approxmately 36 percent of the Cty’s busness

ncome tax revenues n fiscal year 005.

Fnancal servces are mportant not only n terms of economc output, but also n terms of jobs Natonally, the ndustry drectly accounts for one n every 19 jobs.3Many states are hghly dependent upon the sector: n Connectcut, Delaware, New York, and South Dakota, sector employment represents 8 to 10 percent of non-farm prvate sector jobs In New York Cty, financal servces employment represents 1

n every 9 prvate sector jobs Other US ctes are also heavly relant on financal servces, ncludng Hartford (1 n every 8 prvate sector jobs), Charlotte (1 n 1), Boston (1 n 14), San Francsco (1 n 14), and Mam (1 n 18).4

The largest sector of financal servces employment n New York s the securtes

ndustry In 005, the securtes ndustry accounted for 171,000 of the 38,400 financal servces jobs n New York Cty.5 Drect jobs are one very vsble contrbuton, but the sector also creates a large number of ndrect jobs A recent study by the Comptroller of the State of New York revealed that every securtes ndustry job n the Cty creates two addtonal jobs n other ndustres.6 Many of these jobs are related

to financal professonals’ consumpton and employ lower and mddle ncome workers, although other professonal servces sectors also benefit, albet less sgnficantly

Fnancal servces are also of broader value to the natonal economy In addton to beng

a sgnficant source of economc growth, tax revenues, and employment, well-regulated and efficent financal markets fuel growth by optmzng captal allocaton and allowng market partcpants to rase captal at lower cost.7 Furthermore, captal markets also enhance financal stablty through better rsk management and dversficaton, whch means lower overall systemc rsk not only for large financal nsttutons, such as the banks and money managers wth whom Amercans nvest ther savngs, but also for all

US companes Fnally, captal markets provde an efficent lnk to the broader global economy, forcng domestc nsttutons to be more efficent, and therefore boostng the

nternatonal economc compettveness of the Unted States

1

7