Feb. 20 (Bloomberg) -- It was the moment they'd all been waiting for. Way up in a New York skyscraper, inside the Times Square headquarters of Morgan Stanley, bankers and brokers were about to learn how their boss, John Mack, would divvy up millions of dollars in bonuses for 2006, the richest year in Wall Street history.

Only Mack wasn't there.

Instead, he was an ocean away on that December day, congratulating his stars in London. In an office overlooking the River Thames, Chief Executive Officer Mack was anointing more than 70 new managing directors in Europe, where revenue has been growing by about 40 percent a year lately, more than double the rate in the U.S.

In this era of superlatives on Wall Street -- record profit, record pay, record mergers -- a chorus of alarm is rising over a tectonic shift within the global securities industry.

President George W. Bush and Treasury Secretary Henry Paulson have warned that the U.S. risks losing its edge in the financial world as markets in Europe and Asia grow.

Two studies -- one conducted by McKinsey & Co. for New York Mayor Michael Bloomberg and New York Senator Charles Schumer, and another done by a group of executives and academics -- have concluded that excessive regulation is making the U.S. an unattractive place to sell new stocks. (Bloomberg is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.)

In particular, the reports single out the Sarbanes-Oxley Act of 2002, the antifraud law passed after the debacle at Enron Corp.

IPO Flight

Both studies point to figures that show initial public offerings are migrating to Hong Kong and London, where underwriters charge half of what they do in the U.S. If IPOs flee, the thinking goes, trading, investment and jobs will follow.

Unless the U.S. takes action -- including relaxing the way Sarbanes-Oxley regulations are followed -- New York will lose its spot as the world's financial capital, according to McKinsey. The resulting upheaval would jeopardize 30,000-60,000 U.S. jobs, the 134-page report says. A third study, this one from the U.S. Chamber of Commerce, is due out in March. Paulson, former chief executive officer of Goldman Sachs Group Inc., will convene a conference in Washington in March to take up the issue.

``America's capital markets are the deepest, the broadest and most efficient in the world,'' Bush said in his Jan. 31 State of the Economy report, which he delivered at Federal Hall, across the street from the New York Stock Exchange. ``Yet excessive litigation and overregulation threaten to make our financial markets less attractive to investors, especially in the face of rising competition from capital markets abroad.''

`Gold Standard'

His warning echoed one that Paulson had issued to former Wall Street colleagues in November.

``Historically, the U.S. markets have represented the gold standard,'' Paulson said in a speech at the Economic Club of New York. ``Yet recently, in the wake of new, heightened regulatory and listing requirements for all public companies in the U.S., we have witnessed changes in IPO activity.''

With all of the hand-wringing, you'd think Wall Street was going down the tubes. On the contrary, U.S. financial firms have never been more profitable. Citigroup Inc., Goldman Sachs, Morgan Stanley, JPMorgan Chase & Co. and Merrill Lynch & Co. -- all based in New York -- collected more fees from underwriting securities and advising on mergers and acquisitions in 2006 than any other firms, according to data compiled by Bloomberg. These five firms made more than $60 billion in net income last year. Their employees around the globe pocketed an estimated $60 billion in bonuses. In all, investment banks worldwide collected $71 billion in fees from M&A and underwriting, the most since Bloomberg began keeping records.

Easing Rules

Amid such riches, calls to roll back rules designed to prevent another Enron ring hollow, says Amy Borrus, deputy director of the Washington-based Council of Institutional Investors. Strong regulation helps the U.S. by fostering confidence in its markets, she says.

``It is ironic that, in a year when Wall Street raked in mountains of profits and paid record bonuses, they would be complaining about competitiveness,'' says Borrus, whose organization represents 140 public, union and corporate pension funds with combined assets of more than $3 trillion.

The McKinsey report says the U.S. can't afford to wait. To help American markets compete, the U.S. government should ease immigration restrictions, so banks can attract more talent from overseas, and take steps to curb costly litigation, the study says.

$6 Billion

The New York-based consulting firm also recommends that the Securities and Exchange Commission and the Public Company Accounting Oversight Board, which oversees auditors, change guidelines for the Sarbanes-Oxley rules. Section 404 requires managers of companies that are publicly traded in the U.S. to evaluate their international financial controls and hire outside auditors to sign off on those assessments. Under Sarbanes-Oxley, executives also must personally certify the accuracy of financial results.

All of that takes money. Companies probably spent $6 billion in 2006 to comply with the Sarbanes-Oxley law, according to a study by Boston-based AMR Research Inc. On average, a company spends about $4 million a year to comply with section 404, according to surveys by Financial Executives International, a Florham Park, New Jersey-based organization representing 15,000 corporate financial executives.

Accounting costs are only part of the equation, says David Chavern, senior vice president at the Washington-based U.S. Chamber of Commerce. ``The real worry is that if going public in the U.S. means you are subject to Sarbanes-Oxley and large securities class- action suits, then it makes it harder to raise capital,'' he says.

`Race to the Bottom'

Rob Nichols, president of the Financial Services Forum, a Washington-based Wall Street lobbying group, says he backs revising Sarbanes-Oxley implementation guidelines. Gutting the law would be a mistake, he says.

``We don't want a race to the bottom,'' Nichols says. ``IPO data doesn't tell the whole story. It would be disingenuous to link IPOs to Sarbanes-Oxley exclusively.'' In December, the SEC and PCAOB proposed new guidelines for Sarbanes-Oxley implementation.

There's no denying that the center of gravity has begun to shift in the world of finance.

Like America's factory workers, U.S. bankers, brokers and traders confront the challenge of globalization, says John Silvia, chief economist at Wachovia Corp. This medley of economic, financial, trade and technological interrelationships is leveling the competitive playing field between the U.S. and the rest of the world. Since 1979, the U.S. has lost a net 3.5 million manufacturing jobs, or 34 percent of its factory workforce, according to the Bureau of Labor Statistics.

Wall Street Threat

Wall Street isn't immune. In the past few decades, a confluence of powerful forces -- from the political and economic integration of Europe, to the triumph of capitalism in the former Soviet Bloc, to the emergence of China and India as economic powers, to cheap, ubiquitous telecommunications -- has heightened global rivalries for deals and trading.

``In the 1980s, the only place was the U.S.,'' says Robert Steel, U.S. Treasury undersecretary for domestic finance. ``Now, there is much more competition.''

Large companies used to raise money in New York no matter where they were based. Many still do. These days, however, you don't have to come to the U.S. to tap global investor dollars.

When Industrial & Commercial Bank of China went public in a world- record $16.1 billion IPO in 2006, the Chinese bank listed its stock in Hong Kong and Shanghai. Russian oil giant Rosneft Oil Co. last year sold $10.7 billion of new shares in London, which is three hours behind Moscow, rather than in New York, which is eight hours behind.

Global Reach

Last year, more than 350 companies went public in Europe, selling $86 billion of stock, according to data compiled by Bloomberg. In the U.S., 235 companies raised $48 billion in IPOs. In 1999, 507 companies went public in the U.S., selling a combined $63.93 billion of stock. Not one of the 10 largest stock issues of 2006 was listed in New York.

Wall Street firms win wherever the deals are made. The likes of Citigroup and Goldman Sachs profit from underwriting stocks the world over. Although none of the 10 biggest stock offerings of 2006 were done in New York, New York-based firms played a role in all of them, sharing in the $1.7 billion in fees those sales generated.

Merrill Lynch had a hand in the Industrial & Commercial Bank of China IPO, which generated $401 million in fees. The second-largest IPO of 2006 -- an $11.2 billion sale by Bank of China Ltd. -- was arranged by the Chinese bank itself, Zurich-based UBS AG and Goldman Sachs. Banks earned $280 million in fees on that sale. The Rosneft IPO, which yielded $142 million in fees, was arranged by Amsterdam-based ABN Amro Holding NV, London-based Dresdner Kleinwort Group Ltd. and two New York-based firms, JPMorgan Chase and Morgan Stanley.

Shrinking Share

The result is that global securities firms are generating a smaller share of revenue in the U.S. and a greater proportion elsewhere.

Since 2001, the U.S. share of worldwide securities industry revenue has fallen to about 58 percent from 62 percent, according to the New York-based Securities Industry and Financial Markets Association. Investment banks earned $41.7 billion in fees underwriting securities and advising on mergers in Europe and Asia last year, almost 40 percent more than the $29.9 billion they earned in the U.S., according to Bloomberg data.

The U.S. is no longer the market hyperpower it once was. Today, its equity market, the world's largest, accounts for about 37 percent of the combined value of public companies around the globe. In 2001, that figure was 50 percent.

Markets Grow

Europe is challenging the U.S. in the fast-growing market for derivatives, which are instruments whose value is based on another security or benchmark. Europe also has grabbed 56 percent of the $52 billion of global revenue from over-the-counter derivatives, which aren't traded on exchanges. London dominates the $2.7 trillion-a-day foreign exchange market, with 32.4 percent of all trades compared with 18.2 percent for New York, according to consulting firm International Financial Services London.

It's not that America's economy and markets are shrinking -- it's that other ones are growing. At $12.8 trillion, Europe's combined economic output is approaching the $13.3 trillion of the U.S. Emerging markets' share of the global stock market capitalization has doubled since 2000 to more than 16 percent. According to Goldman Sachs, the combined economies of Brazil, Russia, India and China, the so-called BRIC group, will dwarf those of today's six largest industrial economies -- the U.S., Japan, Germany, the U.K., France and Italy -- within 40 years.

`Does it Matter?'

Wall Street profits from new markets and the waves of capital that now roll across oceans and time zones, says Glenn Hubbard, chairman of Bush's Council of Economic Advisers from 2001 to '03.

Hubbard, now dean of Columbia Business School, is a member of the Committee on Capital Markets Regulation, which conducted one of the two studies on Wall Street competitiveness. Harvard Law School professor Hal Scott and John Thornton, former president of Goldman Sachs, led the private panel along with Hubbard. The study was funded in part by the $3.5 billion Starr Foundation, which is run by Maurice Greenberg, former CEO of American International Group Inc.

Does it matter where the deals get done? ``Wall Street really doesn't care,'' Hubbard says. ``They just want to make sure that the U.S. is on par with other markets.''

Treasury Undersecretary Steel agrees that U.S. firms stand to profit as new markets open and expand. Still, the U.S. can't afford to be complacent. ``Because the global market is growing doesn't mean that the U.S. shouldn't work hard to maintain its top position,'' he says.

High U.S. Fees

For all of the talk about keeping U.S. markets competitive and safeguarding jobs, the reality is that investment banks have helped price the U.S. out of the global IPO market. Firms charge more to underwrite stocks in the U.S. than they do elsewhere. In the U.S., investment banks charged fees averaging 4.4 percent of the value of stock sales in 2006, according to Bloomberg. In Europe, that average was 2.3 percent.

U.S. IPO fees, which can reach as much as 7 percent, are a holdover from the days when brokers charged fixed commissions. When the SEC abolished that practice in 1975, howls went up that Wall Street was doomed. And yet investment banks still charge roughly what they did three decades ago, when companies paid securities salesmen commissions amounting to 60 percent of the total fee and divided the rest between the sale's managers and underwriters.

In the past, companies paid this premium to gain access to U.S. markets, partly because they didn't have a choice, says Clay Corbus, co-CEO of San Francisco-based WR Hambrecht & Co., which has pioneered an auction-based IPO system that charges 4 percent for sales totaling less than $100 million. Now, companies can go where fees are lower, he says.

``We don't have a monopoly on smart people or capital,'' Corbus says. ``If we remain arrogant, somebody else will eat our lunch.''

European Choice

Peter Solomon, former vice chairman of Lehman Brothers Holdings Inc., agrees. ``Wall Street will have to lower IPO fees,'' says Solomon, who's now chairman of New York-based investment bank Peter J. Solomon Co.

More banks compete for IPOs in Europe than in the U.S. because the European market is more fragmented, says Klaus Diederichs, head of European investment banking at JPMorgan Chase in London. In the U.S., five banks -- Citigroup, Goldman Sachs, JPMorgan, Lehman Brothers and Morgan Stanley -- captured 54.3 percent of total IPO fees in 2006, according to Bloomberg data.

For companies based in Europe, the Middle East and Asia, the choice of where to raise capital often comes down to geography and time zones. ``London is one of the most attractive and open markets in the world and, increasingly, a location of choice for businesses looking to access international capital markets,'' Diederichs says. ``European issuers are much less interested in tapping the U.S. market than they used to be.''

London Rising

If non-U.S. companies shun U.S. markets, New York may be headed for trouble. Unlike factories, global financial firms can - - and do -- make money everywhere. Bankers who live and work in New York can't. Jobs and pay follow the money.

During the early 1980s, Mack's firm, Morgan Stanley, employed about 3,000 people in the U.S. and fewer than 100 in London. Today, the firm has 6,000 people in London as part of a European workforce of 9,000, and about 42,000 in North America.

Jonathan Chenevix-Trench, chairman of Morgan Stanley International, says Mack's December visit underscores how important Europe and Asia have become to Morgan Stanley.

``Mack was recognizing the growing contribution to the performance of our group by businesses outside the U.S.,'' Chenevix- Trench says. In 2006, Morgan Stanley opened or approved new offices in Budapest, Dubai, Istanbul and Qatar. The firm has 15 U.S. and Canadian offices and more than 30 in other countries.

New York Jobs

Lately, London has been gaining financial services jobs, while New York has been losing them, according to McKinsey. In London, the total number of jobs in the securities, banking and insurance industries rose 4.3 percent to 318,000 in 2005 from '02. In New York, that figure fell 0.7 percent to 328,400 during that period.

``Would New York like to capture all the financial services jobs being created elsewhere? Sure,'' Wachovia's Silvia says. ``But you can't convince Wall Street to keep hiring in New York when they need more people in London, India or China.''

New York has been a hub of securities trading since the 1700s, when local merchants and traders began congregating around Wall Street. In May 1792, under a buttonwood tree at what's now 68 Wall Street, they agreed to establish the bourse that has grown into the New York Stock Exchange.

Today, in the world of the Web and the BlackBerry, ``Wall Street'' is less a place than a global network of people who make their living moving money around. You don't have to be in New York to trade. As the U.S. has gotten wired, the city's share of U.S. securities industry jobs has dwindled, falling to 21.5 percent in 2006 from 41 percent in 1973.

Balance of Power

It wouldn't be the first time the balance of power tipped in finance. The Dutch developed exchanges first, in about 1611, and for a while, Amsterdam ruled the financial world. Then, as the British Empire expanded in the 18th and 19th centuries, London came to dominate international trade and finance. In the 20th century, amid the ashes of two world wars, New York grabbed London's crown. That U.S. financial firms can today set sail for markets that didn't exist a few decades ago represents a triumph for American-style capitalism.

``In the last 20-25 years, a fundamental change has been the embrace of more market-based strategies for countries and economies around the world,'' Steel says. The likes of Citigroup and Goldman Sachs will thrive from London to Shanghai, as they have at home. New York may just have to accept that even its masters of the universe can't hold back the tide.

To contact the reporter on this story: Deepak Gopinath in New York at dgopinath@bloomberg.net.

Last Updated: February 20, 2007 00:03 EST