The other shoe drops in London's financial hub

Little more than a year ago, British Prime Minister Gordon Brown declared a "new Golden Age" for London's soaring financial industry.

London's equivalent of Wall Street, called the City, handled more currency exchanges than New York City and Tokyo combined, attracting investments from Russia to the Middle East to India.

Now, the City is in tatters, a victim of the financial meltdown engulfing the world after a decade of Britain's unprecedented economic growth.

Financial-sector jobs and bonuses are being axed, amid a crisis that London's Evening Standard newspaper headlined as "Bonfire of the Billionaires."

For London developer Kevin Kavanagh, the dethroned bankers and traders and their risky investments are responsible for the sinking economy, and he resents it, as do others.

"The City boys have already made their money — they've still got it," Kavanagh says. "They might downsize from a Lamborghini to a Porsche. But they've still got their millions. They still go to the same posh restaurants, while lots of other restaurants are going under, while everyone else cannot get a bank loan."

As the ripple effects start to sink in, people are asking how long the downturn will last and whether London can reclaim being a global financial hub.

"It's hard to know exactly what will happen when it's all over," says Richard Snook, senior economist with London's Center for Economics and Business Research, an analysis firm. "London was attracting all the international business. We'll have to see if that continues or if it will shift to other parts of the world."

Snook says London already is in a recession, possibly worse than Wall Street's, and it will run another 18 months.

His firm, which closely monitors activity in the City, says:

• London's financial sector is cutting 28,000 of its 352,775 jobs this year, and 34,000 more next year. That's back to levels a decade ago, when the City was on its rise. New York City Comptroller William Thompson estimates 35,000 of the 530,000 financial jobs in that city will disappear over the next two years.

• Bonuses earned this year by London bankers, traders and hedge fund tycoons will be sliced to $6.2 billion when paid in the first few months of 2009 — less than half the $14.9 billion handed out early this year.

• New registrations of so-called "City boy toys" have fallen: Porsches are down 27% from a year ago, and Aston Martins are down 25%. Prices for real estate, where City players poured about half their bonus money, are dropping in such posh areas as Knightsbridge and Chelsea-Kensington.

There is little sympathy for big bankers such as Sir Fred Goodwin of the Royal Bank of Scotland, who this week gave up his chief executive job, salary and bonus for the year in return for the government stepping in to capitalize the bank. His salary last year was $6.8 million, plus a $2.2 million bonus.

Credit is tight, despite Brown's massive bailout plan to prop up three of Britain's biggest banks with taxpayers' money and a move by the central Bank of England to ease lending, says developer Kavanagh, who describes himself as "a small guy."

Kavanagh, 54, employs about 15 people to manage, redevelop and staff his commercial and residential properties in central London. Among his properties: a tapas restaurant that just went under. He's quickly refurbishing it to reopen in two weeks as a traditional English restaurant. He hopes that solid, traditional food at a good price fits the taste of the new economic times.

He's finding that his bankers are demanding more, including using his house as equity for a commercial loan. The banks want 50% down, rather than 20%, he says.

"The bankers aren't loaning — or it's astronomical if they do," he says. "We cannot do anything until they get liquid again. I'm not sure the (government's) bailout will solve it."

The shock waves run deeper than luxury goods and bankers' jobs.

About 40% of small businesses have seen a drop in customers and a rise in bank costs in recent months, says the Federation of Small Businesses, which represents 4.7 million companies across the United Kingdom.

Britain's unemployment rate rose for the third quarter to 5.7% in August — the biggest increase since 1991, when Britain was in a recession.

Even if the economy gets better, there already are predictions that London's financial sector won't return to its previous high-flying stature.

Charles Goodhart, professor emeritus of finance at the London School of Economics, says that despite "some indications that power, wealth and influence are shifting to Asia," London will retain its financial prowess and re-emerge when the downturn is over.

"Everything and everybody is going to take a hit for the next few years," says Goodhart, a former adviser to the Hong Kong exchange. "With the entire world going into recession, (Britain) … is seen as relatively safe."

And when a turnaround comes, the City will be influential again. "London," he says, "will continue."