Financial freedom of the East

Spring might be in the air in New York, but love definitely is not. The three words you are most likely to overhear whispered in the bars and brasseries of midtown are not “I love you” but “its all over.” Everyone involved in the financial services industry has been watching with mounting horror how politicians and pundits have worked themselves into a fury. First it was the “outrage” of AIG bonuses. Then the government broke the bankruptcy law to give unions 55% of Chrysler at the expense of the senior bond holders. Now comes the new regulatory bill going through congress, which in all likelihood will include compensation caps.

The rank hypocrisy of many of these politicians is only matched by their demagoguery. Many people still working in the financial industry just feel that it is no longer worth it. Death threats to AIG employees, 90% bonus taxes, perp walks and prison. Bleh.

But for those of us who have been around a bit, we know it’s not all over: It’s changing but it’s not over. Recent market rebounds, some flurries of hiring, risk coming back to the party. It’s slow, it’s a beginning. And although no one knows quite what the market will look like in three years, you can bet anything that it won’t look like it did in the summer of 2007.

For some this represents a huge opportunity. Asia’s financial centres – Hong Kong, Singapore and wannabe Seoul – face perhaps the chance of a lifetime. If you are the global head of investment banking sitting in a US bank in New York, working every day and knowing that whatever money you make might be retroactively taxed at 90%, there doesn’t seem to be much point in going to work. But what if you are sitting in Asia, still the global head of the business but in a separately structured subsidiary, master of your own business, sensibly taxed and able to hire and compensate your employees without any howls of faux outrage, life looks very different.

If I were high up in the government of Hong Kong or Singapore, I would be blanketing CNBC and the Wall Street Journal with ads proclaiming the financial freedom of the East. I would have my financial secretary offering tax breaks to hedge funds to relocate their business to Asia. I would probably pay for the airfare.

Never has so much investment talent been so under stress. Market friendly governments in the East should take advantage of the stupidity of their counterparts in the West and lure the heads of these businesses. 15% tax rates haven’t ever looked this good.