Wall Street: A Blow to U.S. Prestige?

(page 2 of 2)

where will the best and brightest go?

Most often, the reaction abroad has been jaw-dropping disbelief. Hope Chen, a partner at venture capital firm Draper Fisher Jurvetson China in Shanghai, spent the weekend of Sept. 13-14 glued to coverage of the crisis. "I was shocked and very concerned to be sure," says Chen. Still, she has no plans to sell the home she owns near San Francisco nor stop sending her two kids to the U.S. every summer.

A long-term issue for the U.S. may be the attitudes of future masters of the universe. America's extraordinary ability to attract the smartest people in the world could be eroded if the globe's overachievers decide that the center of the universe is no longer Manhattan. Sally Gong, a 25-year-old working in the Beijing office of a small American investment bank, has postponed plans to attend grad school in the U.S. "There are more opportunities in China," she says.

In some areas, Wall Street's comeuppance is a plus: It vindicates Europe's less profitable—but less risky—banking practices. Either because they were more prudent or because regulators tied their hands, the likes of Germany's Deutsche Bank and Spain's Banco Santander look strong. But Deutsche CEO Josef Ackermann isn't writing off his American rivals. "I wouldn't bet against U.S. banks," he says in an e-mail. "It's still unclear who the winners of this crisis will be."

It's important to remember that in much of the world, crises are met with parliamentary dithering at best, or at worst opaque decision-making by an unaccountable elite. So among foreign bankers and citizens alike there is admiration for the way Treasury Secretary Henry Paulson tossed out decades of Republican free-market dogma and pledged hundreds of billions of dollars to rescue the banking system. "The speed with which America has moved over the past 8 to 10 days is truly phenomenal," says Uday Kotak, vice-chairman at Mumbai's Kotak Mahindra Bank. "I don't think any other country could have done that."

To foreign eyes, the crisis has brought a humbler, more cooperative U.S. After nearly eight years of a George W. Bush White House not known for multilateral decision-making, foreign leaders are pleasantly surprised by the degree to which U.S. officials have kept everyone in the loop. "I've had several conference calls with Hank Paulson over the last few days, and there have been daily—and nightly—calls between our respective deputies," says French Finance Minister Christine Lagarde.

Not everyone welcomes the new leadership coming out of Washington. The U.S. decision to halt short-selling of stocks, for instance, was followed by France, Britain, Taiwan, Australia, and others. "When the Asian central banks and securities regulators heard that the U.S. had banned short-selling, they couldn't believe their luck," says Thomas Naughton, chief investment officer for equities at PMA Investment Advisors in Hong Kong. "They've always hated short-selling, and having the SEC ban it gave a big boost to the forces of regulation."

That could be a problem: A less competitive U.S., many fear, will cut pressure on foreign governments to fix their own systems. Recent European reforms have been driven largely by envy of U.S. growth. And in India, opponents of reform may be hoping America's troubles will put the brakes on change. Raghuram Rajan, ex-chief economist at the International Monetary Fund and a University of Chicago professor, led a commission studying financial reforms. When Rajan presented the group's findings in Mumbai just a day or two after the Fannie Mae-Freddie Mac bailouts, he recalls, "people were saying to me: 'Is the U.S. the kind of model we want to go with?'"

Ewing is BusinessWeek's European regional editor .