Quotes of the Day

The four young British men, all employed in London's financial center, laid out the rules for their upcoming vacation in Dubai, where they planned to watch a rugby tournament. "Cheating [on girlfriends] is allowed," read their e-mailed compact, which was quickly passed around by employees at top financial and law firms in early February before finding its way to the British press. "Chants about ... how rich we are," the gone — viral e-mail insisted, were "compulsory." And as for group sex acts, cameras were permitted — "for evidential purposes." When the contents of the private e-mail and the identities of its authors were made public, the attitudes of the young men — some of them pictured in the newspapers drinking champagne and posing stripped to the waist — seemed to confirm to the British public that nothing had changed in the lives of the overpaid buffoons who work in the City of London, as Britain's financial center is known. They continued to spend lavishly and live ostentatiously even though they had helped steer the country into a deep financial crisis. CITY BOYS VIRAL EMAIL SHAME, read a headline in the Mirror tabloid.

But the truth is more complicated. While the unedifying culture of excess lives on in some corners of the City, the financial sector's high-flying employees are not as carefree as they once were. "People are looking over their shoulders," says Geraint Anderson, a former stock-broker who worked in banking for 12 years. "There is job insecurity." Anderson, who quit his job in 2008 and published an account of his years in the industry called City Boy: Beer and Loathing in the Square Mile, says many former high earners have been laid off and those with jobs are stepping — and spending — gingerly in the wake of the global banking crisis that hit London-based investment banks hard. "Bonuses are down, obviously, and so are expense accounts," Anderson says.

The combination of the economic downturn and the hostility many British people feel for the City has generated something of a siege mentality in the financial center. That anxiety has, in turn, created a host of problems for the cash-strapped government. How can a country that has for so long relied on its financial sector for growth find a new path to economic stability? And how can the government build up new industries and satisfy a political thirst for bankers' blood without chasing away the financial institutions the country still depends on for huge amounts of tax revenue and employment?

As the global financial crisis unfolded in 2008, the decline of the City as a revenue-generating machine for the British government's coffers was dramatic. In the tax year 2006-07, banking contributed 24% of the U.K.'s net revenue from corporation tax. In 2009-10 that number fell to 13%. (Over the same period Britain's overall tax take fell from $677 billion to $653 billion.)

But the City, even cut down to size a little, remains a linchpin of the British economy. "If you have a world-class industry and you have a competitive advantage, then you'd be mad to throw it away," says Alastair Darling, who was Britain's Finance Minister from 2007 to 2010. Which explains why Prime Minister David Cameron, the son of a stockbroker, is fighting a dogged battle on behalf of Britain's least loved industry. In December, Cameron vetoed changes to a European Union treaty that were designed to stabilize the troubled euro because they would have allowed for a new tax on the City. The proposed tax would have been levied in Frankfurt and Paris as well as London, but the City dwarfs its continental rivals. The value of the companies trading on the London stock exchange stood at $3.26 trillion at the end of 2011, compared with Frankfurt's $1.18 trillion. Cameron believed he could not take the chance that the banks would move overseas.

The City's heady journey to prominence in British business life began in 1986, when Margaret Thatcher's Conservative government swept away a raft of arcane financial regulations. Trading systems were computerized the same day the laws changed. Other countries were slower to push through similar changes, which made London attractive for foreign financial firms. In 1980, the year after Thatcher was elected, workers in the banking and insurance industries contributed 6.1% of total income tax to the country's coffers. By 2006, that figure had more than doubled, to 14.6%. Britain's manufacturing base moved in the opposite direction. In 1979 it generated around 27% of GDP. Last year it stood at 10.2% of GDP.

Thatcher's capitalist revolution — and nurturing of the City — was eagerly continued by Tony Blair's center-left Labour Party, which took over from the Conservative Party after the 1997 elections. Blair's government used the tax windfalls generated by the financial sector to repair the crumbling infrastructure, rebuffing criticism of his government's closeness to the City by pointing to the new schools and hospitals built with City cash.

From the years of City-fueled economic growth that Britain enjoyed up until 2008, there emerged a character type that came to be known as the City Boy: an unapologetic big spender who drove a Ferrari and swilled Bollinger as if it were beer. But even as the City's windfalls dwindled — Britain's debt now stands at $3.685 trillion (147.3% of GDP), according to the U.K. Treasury's numbers for January — enough stories of outrageous City Boy antics live on to stir public disgust.

"I know of one banker who took 12 clients to a renowned London restaurant recently for a late lunch," says Anderson, who used to write an anonymous column called City Boy for a London newspaper and now writes crime novels set in the City. "When the maÎtre d' told them they had to make way for the evening sitting, they told him they'd buy four bottles of the 1941 Chateau D'Yquem dessert wine, at £4,000 [$ 6,400] a bottle, if they were allowed to stay."

But the people who really make the British public fume are the City Boys' bosses. Anger about bankers' remuneration — and attitudes — hit a high point in January when Stephen Hester, chief executive of Royal Bank of Scotland (RBS), was forced to waive a nearly $1.6 million bonus following a public outcry. RBS is the least popular of Britain's banks; bailing out the huge bank in 2008 cost taxpayers $72 billion. Days after Hester took a tactful pass on his bonus, his predecessor, Sir Fred Goodwin, was stripped of his knighthood for steering RBS into near collapse.

This sorry state of affairs has led many in government and finance to conclude that the country that gave the world steam trains sorely needs a new industrial revolution. David Blanchflower, a former member of the Bank of England committee that sets the nation's interest rates, argues that unless the U.K. diversifies and invests heavily in growth industries like green energy, it will remain vulnerable to another banking crash. But he acknowledges that "it will take 20 years to adjust."

There are pockets of growth in the British economy, however, including the creative industries. Video games, advertising, music and design are all expanding. The accounting firm Ernst & Young says exports of those products and services will increase by at least 8.7% from 2010 to 2020. Manufacturing is not dead either. Britain produced 1.34 million cars last year, up by 5.8% from 2010.

For the nation to have a hope of regaining its strength, though, the financial sector has to grow again, says Stuart Popham, vice chairman of EMEA banking at Citigroup, even if much of the British public would likely watch that growth with suspicion.

"There's been a perception of the financial services as not being part of the real economy," Popham says. "It is for the financial services to prove they are at the heart of the future growth of the country." But as long as the City's young and well remunerated continue to fulfill the worst expectations of the British public, that could be the toughest sell the City has ever had to make.

• James Robinson / London
• London's bankers may be the least popular people in Britain, but the U.K. still relies on the City's huge financial sector to keep the country afloat