Credit Crisis Fallout Hammering New York, London Economies

Financial centers such as New York and London can expect significant economic impact from the global contraction of the financial sector. The fiscal effects on New York City and New York State will be particularly acute, due to their heavy dependence on tax revenue derived directly or indirectly from financial sector performance, according to Oxford Analytica.

Financial sector shrinkage will sharply diminish New York State and City tax revenues (which comprise a combination of income, consumption, and property taxes):

• Bankruptcies and mergers stemming from the current crisis have led to significant financial sector job losses. Even stronger firms such as Goldman Sachs (GS) have shed positions.
• New York Governor David Paterson suggested in late October that Wall Street job losses would top 45,000, while other sources estimate these losses may reach as high as 80,000; total private sector job losses in New York state could reach 160,000.
• Jobs in New York City’s finance, insurance, and real estate sectors account for about 1/3 of personal income earned in the city.
• The combined New York metropolitan area is expected to lose as many as 100,000 jobs in financial services. Other regional markets, such as the Boston area, also can expect significant job losses.
• In addition, jobs in service industries that cater to the Wall Street economy — such as restaurants and retail — are also expected to experience declines. Moreover, other sectors, such as the media, have seen a sharp decrease in employment; Paterson has cited state projections that New York’s unemployment rate will climb to 6.5%.

Until the spring of 2007, many policy and regulatory initiatives were measured with an eye to what impact they had or would have on the competitiveness of New York as a financial sector. The current crisis has dropped such concerns to the wayside.

The global credit crunch has also affected UK financial institutions:

• While financial sector job losses are expected to be more moderate in percentage terms than in the United States, the London-based financial sector may lose about 30,000 jobs in 2008, with 2009 figures expected to be at least one-third higher. These cuts stem from reduced performance rather than the recent increase in political and regulatory pressure.
• Although a wide reconsideration of the role of compensation structures in encouraging unnecessary risk taking is underway, some UK banks quietly have suggested that the impact of such discussions on 2008 bonus levels (below the senior executive level) will be minimal, though other independent estimates suggest bonuses may shrink by at least 50%.
• The knock-on fiscal effects of the credit crunch due to a shrinking real economy are also expected to be considerable. As in the US case, loss of lucrative financial jobs and slashing of bonuses will have knock-on effects in employment in retail and other service sectors, leading to the loss of one to two other jobs for every financial sector redundancy.

As noted on Research Recap last week, London’s financial services sector saw its largest drop in business in at least 20 years.

As the premier world financial centers, both New York and London will see serious fiscal consequences from the collapse of the financial sector. But neither center is expected to weaken its current regulatory environment in order to attract more financial sector activity and employment from a shrinking global pool.