London's Gathering Storm

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Move away from London, however, and you get a rather different perspective. Across the English Channel, Thierry Jacquillat, chairman of the Greater Paris Investment Agency, looks at what's happening in world financial markets and says: "The economy of Paris will resist the shock better than London. We're more diversified." And in Brussels, at the European Trade Union Institute, economist Andrew Watt draws some uncomfortable historical parallels. "There was some idea that the financial sector was immune," he says. "It's like pinning your hopes on anything, whether it's textiles in the north of England or the car industry around Birmingham. It expands for a while and then it takes a nasty knock."

Boris Johnson, London's charismatic, mop-haired mayor, takes issue with the notion of overdependence, saying that the city's economy has "a very, very wide base." But he tells TIME: "The strength of the financial sector is obviously pretty important in acting as a flywheel to spin those other wheels. And I'm going to be fighting very hard to make sure that we don't in any way gum up that machine."

River of Gold
To see how finance has reshaped the British capital, take a trip to Greenwich, about 3 1⁄2 miles (6 km) downstream from Tower Bridge and home to the Royal Observatory, which dates back to 1675. It's the birthplace of Greenwich Mean Time, but for years the area was as well known for its mean streets: 19 Greenwich neighborhoods rank among the most deprived in England. Since 2001, the local council has pursued a major state-funded regeneration program aimed at cutting crime and unemployment, and improving the decaying public housing stock. But these days, coexisting with the urban blight, are plenty of new, well-heeled residents in new, well-appointed residences: bankers and others who work at Canary Wharf, the docklands development where Barclays, Morgan Stanley, Credit Suisse and many others have their offices. Greenwich is just a short hop from the wharf, thanks to the Docklands Light Railway, which linked up parts of once dilapidated east London in the '90s. Liam Bailey, head of residential research at realtor Knight Frank, says the gentrification started a decade or so ago, and has accelerated in the past five years. Knight Frank is currently offering plush one-bedroom apartments with river views there starting at about $500,000 apiece.

Local businesses have caught on. At one end of Greenwich's High Street is the Green Baby store, which sells Earth Friendly Baby organic chamomile shampoo and diaper balm made from sweet almond oil and shea butter. A short walk away is the Greenwich Park Bar & Grill, where a burger made from "Kobe" beef raised at a farm in north Wales will set you back $33. Some of these upmarket places have already been feeling the pain. At the Nevada Street Deli, which serves up smoky cheese from County Cork and freshly made poached-salmon sandwiches, owner Laura Heap says she's already noticed a downturn in business: "I get a lot of local mums, and they're spending less. Whereas they used to buy their eggs and bread, now they're just buying a cup of tea." Heap, who opened the shop less than a year ago, has dropped her prices by 25% and let some staff go. She remains upbeat about the future, but with Canary Wharf on her doorstep, she concedes, "I do feel a slight wave of fear."

She has every reason to be scared because financial services have a record of retrenching fast in a crisis. And the business in some sectors has evaporated. The volume of mergers and acquisitions, for example, is down by about two-thirds from its peak in 2006, while the public stock offerings that made the London Stock Exchange a shooting international star have fizzled. Given the role played by arcane financial engineering in triggering the current crisis — the troubles at AIG, for example, stem largely from its freewheeling London financial-products division — the future looks especially bleak for people working in structured finance and complex derivatives. No surprise, then, that HSBC, Citigroup, Credit Suisse and others have started cutting staff.

The Alternative Investment Market (AIM) is a good example of how London got so big in the first place, and how it's starting to pay the price. Launched in the mid-'90s as part of the London Stock Exchange, this market for small companies deliberately set out to cut the paperwork for listing firms to an absolute minimum. There's no need, say, for bulky official prospectuses before a stock is listed on AIM, and the market is overseen not by official regulators but by brokerage firms called "nomads," which are responsible for the new issues. For years, AIM was a fabulous growth story, attracting more than 2,500 companies from around the globe — and brickbats from jealous rivals, especially in the U.S. One top official at the Securities and Exchange Commission in Washington, Roel Campos, even likened it to "a casino." But in the first eight months of this year, only 85 companies listed on AIM, compared with 201 in the same period a year ago — and almost twice as many have dropped off it. "Capacity is massively down," says Tom Nicholls, a partner at London law firm LG who specializes in matters related to AIM. The nomads themselves are now under financial pressure — their number has dropped from 80 to 69 — and the remaining ones are pessimistic; at a June conference, they were asked how long they thought it would take before the market for new listings bounces back. The overwhelming consensus: not before the end of next year. "There'll certainly be an 18-month lull," says Nicholls.

All of this amounts to a particularly tricky issue for one man who has played a key role in the City's growth: Prime Minister Gordon Brown. As Chancellor of the Exchequer for 10 years, his support for financial services was especially notable because his Labour Party had a history of antagonism with the City. Brown sought to convince the financial community that New Labour would be probusiness, pro-enterprise, noninterventionist and keen to cosset the rich, believing their wealth would trickle down into the wider economy. Brown also led the way for Britain to put in place a new governance system for financial services that he and other politicians like to refer to as "light-touch" regulation (although bankers and regulators cringe at that phrase; they prefer to call it "appropriate" regulation). In June 2007, just days before he replaced Tony Blair as Prime Minister, Brown gave a rousing speech at the traditional black-tie dinner in Mansion House, the residence of the Lord Mayor of the City, brashly predicting "an era that history will record as the beginning of a new golden age for the City of London."