Daniel Gross

New York, Before And After 9/11

Ten years after 9/11, much of the coverage and analysis has focused on the human toll and the policy outcomes of the attacks. But it's also worth reflecting on a larger question -- the one about the status of New York as a financial capital.

In addition to sowing terror and fear, the terror attacks had a more literal intention to damage, if not destroy, America's political and military capital, along with America's financial capital. The World Trade Center was chosen as a target because of its height, but also because of its location a stone's throw from Wall Street, at the heart of the U.S. financial system.

Similarly but on a much smaller scale, in 1920 a horse-drawn wagon laden with explosives was detonated at the corner of Wall Street and Broad Street, right in front of the New York Stock Exchange and the headquarters of J.P. Morgan, which was literally the center of the American financial system. New York's financial district survived the 1920 bomb attack, which was never solved.

But in the fall of 2001, as the New York Stock Exchange remained closed, as giant Wall Street firms found themselves unable to operate, as one of the nation's largest bond dealers had been obliterated, there was significant concern about New York City's status as a financial capital. Would businesses want to be located in lower Manhattan? Would people feel safe going to work in huge office towers? Given the availability of information technology, wouldn't it simply make more sense for financial firms to disperse through New Jersey, Connecticut and Pennsylvania?

New York's post 9/11 recovery -- economic, psychological and civic -- was remarkable and has endured. Thanks to manmade forces, however, New York's status as a global financial capital has eroded somewhat. But that has nothing to do with the 9/11 attacks and everything to do with the spread of capitalism throughout the world and with wounds that the financial sector inflicted on itself.

We live in a multi-polar financial world, one in which deep reservoirs of capital (and the financial services that go along with them) exist in the Middle East, South America, Europe and especially in China. In 2000, at the height of the Internet bubble, U.S. stock markets accounted for about 50 percent of global stock market capitalization. Today, the figure is more like 30 percent. Each year, most of the largest initial public offerings are staged in overseas markets. U.S. firms may participate, but New York is no longer the center of that highly lucrative business.

The global financial boom enriched New York's financial sector while simultaneously sowing anxiety about the city's role in the evolving order. London, which offered easy access to the Middle East, Russia and Europe, as well as lighter regulation, surged to the fore. In January 2007, New York City Mayor Michael Bloomberg and New York Sen. Charles Schumer called a press conference at which they released a McKinsey report that warned of how the city was losing out to London and other financial capitals.

They needn't have worried about competition from London. When the global financial crisis came in 2007 and 2008, London's banking and financial system fared even worse than New York's. But the city did suffer significant damage as a result of the financial crisis.

Instead of losing out to foreign competition, New York's leading firms lent and traded themselves into oblivion. Bear Stearns, the fourth-largest securities firm, was taken over by J.P. Morgan Chase for a song. Lehman Brothers, the fifth-largest investment bank, failed. Citigroup, the largest American bank, came within a whisker of failing and has since gone on a forced diet, slimming down to a shadow of its former self. Hedge funds big and small blew up. New York today is still the nation's banking capital. But the sector as a whole is smaller, decentralized, less leveraged, less robust and, while still extremely arrogant, less powerful.

Of course, there are still thriving areas. The vast increase in public debt over the last several years has led to a boom in bond trading. The world still comes to New York raise capital. Come by the Nasdaq market center in Times Square, where we shoot many of our Daily Ticker videos, and you're likely to see representatives of a Chinese firm that has just gone public.

And in an age where anyone can work from anywhere, Manhattan still exerts a huge magnetic pull. Each year, thousands of MBAs flock to the city -- to hedge funds, private equity firms, institutions and investment banks. Several years ago, UBS built one of the world's largest trading floors in Stamford, Conn., the burgeoning financial center about 35 miles northeast of New York City. Several other firms, drawn by Connecticut's lower taxes and lower cost of living clustered around I-95. But this summer, UBS decided to move a chunk of its operations back to Manhattan.

Big shots in finance can choose to work wherever they want. The great fear after 9/11 was that many of them would choose not to work in New York out of concerns for safety. For a variety of reasons, ranging from security to quality of life, many financial types have sought greener pastures in Connecticut or in New Jersey. But for the vast majority of America's leading financial firms, a decade after 9/11, midtown Manhattan remains the mecca.

Daniel Gross is economics editor at Yahoo! Finance. Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm

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