he mission of the Partnership for New York City – to enhance the economy of the five boroughs of New York City and maintain the city's position as the center of world commerce, finance and innovation – is now both critical and more daunting than it ever was. Many of the association's partner companies in the financial sector took direct hits from the financial crisis of the second half of 2008. New York's signature securities industry, which employed about 190,000 as recently as 2007, will likely see a 50-percent reduction of that work force when all is said and done.
      The metro area's challenge, explained Partnership President and CEO Kathryn Wylde in a December 1 interview with Editor in Chief Mark Arend, is to (1) keep that talent in New York, (2) position the city's financial sector at the vanguard of new regulatory and economic recovery initiatives that will soon unfold and (3) preserve New York's status as the leading global financial center. Following are excerpts from that interview.

      Site Selection: It was noted in testimony to the New York State Ways & Means Committee Public Hearing on the Economic Crisis on October 17 that Partnership members are scrambling to reinvent themselves. How much of that is reactive and how much is proactive?
      Kathryn Wylde: It's a survival scenario in much of the financial services industry. So the actions are defensive, but they are for the most part proactive. Key examples include, number one, New York institutions moved quickly to craft their own solutions, whether it was conversion of Morgan Stanley and Goldman Sachs to bank holding companies on a weekend or the acquisition of Merrill Lynch by Bank of America or of Wachovia by Wells Fargo, though [the latter two] are not New York institutions per se, but a lot of that action took place in New York. And they are all our members. So the institutions have taken action in the private sector and they have been most aggressive in going after the new business available under the federal [Emergency] Economic Stabilization Act, and positioning themselves to be part of and to lead a national economic recovery. So on both fronts, institutions with a presence in New York are, as usual, at the front of the pack on both the public and private side.

      SS: Is the metro New York economy diverse enough to absorb the current economic situation?
      KW: The short answer is "No." The tri-state regional economy is about a $900-billion economy as of mid-2008. If we were a country, we'd be the 13th largest economy in the world, and the financial services sector is responsible for generating about a quarter of our economic output. So there is no way that you can make up for significant losses in that sector by diversifying into other industries. Additionally, the recession is taking other industries with it.
      Our number two industry is media, and advertising revenues are going through the floor. Retail and tourism is the other big private-sector industry, and again, as of October, consumer sales are plummeting, and the tourism spend is way down. International tourism had actually buoyed the New York retail sector long after it fell apart elsewhere. While there is some diversity in our economy, it is heavily dependent on financial services. The fastest-growing sector in terms of job creation over the last eight years has been professional and business services – again, directly a consequence of New York being the financial capital of the world – so the law firms and accounting firms, consultants and IT companies all have located here and expanded from this space as they track to the leadership New York enjoys in the global financial marketplace.
      The ripple effect through our economy from the loss of financial services jobs is significant.

      SS: Is there a consensus among Partnership members concerning the cause or causes of the financial crisis?
      KW: The simplest comment I've heard about that was from [Goldman Sachs & Co. Chairman and CEO and Partnership for New York City Co-Chairman] Lloyd Blankfein, who observed that we're not really facing a crisis in our companies but rather a crisis of confidence in our financial system. The sub-prime crisis, which was the genesis of the housing crisis and the overvaluation in housing, opened a window onto global securitization that terrified first the financial institutions themselves and then rolled right along as investors and consumers realized what was going on. When consumers picked up on it, then we moved from a crisis in the financial markets to what has been termed the nation's first consumer-driven recession. There has been a collapse of highly visible symbols of an ever-growing economy that has reached virtually everyone in America and around the world. I think of it in terms of, maybe this had to happen, that real estate is historically grounded in very local intelligence and knowledge – all real estate is local. There is something of a mismatch between that and a global economy in which securities are packaged and sold around the world to people who don't have a clue what they're buying. So we had not accommodated the impact of globalization on our financial marketplace. Now, through no choice of our own, we are. Most people think you can't turn a global economy backwards – we've got to move forward and assume we can put in place the systems, the capabilities needed to manage a global economy.

      SS: But these financial companies are no stranger to the global marketplace. They've been operating in markets around the world for years.
      KW: We went from originators under the old Fannie Mae rules – under most securitizations, originators kept a piece of the action. They kept mortgages in portfolio, then they kept at least 10 percent in portfolio, and then suddenly a few years ago they were required to keep nothing and were selling off 100 percent or buying back some tranche of a securitized instrument that had what was supposedly a diversified portfolio of local real estate but without the local players having anything on the line.
      For many years we understood that lending institutions need exposure to keep their estimates of value realistic. Obviously people thought rating agencies were somehow going to fill that gap. Again, we're talking about global institutions that have no idea of local real estate markets. Most of my career was in affordable housing and real estate, and as I have thought about it, many are saying that with no exposure from the lenders and with securitization of real estate, everybody has lost touch, and values escalated, in retrospect, far beyond what they should have. The rules of the game in terms of real estate underwriting and valuation were thrown out in the process of globalization. The technicians who ended up writing the securities and doing the ratings were far removed from knowledgeable and local real estate experts.

      SS: Are members in favor of steps taken by the Treasury and the Fed to restore confidence in the financial markets? Is there a consensus among members concerning new "involvement" in their industry on the part of government?
      KW: Well, we don't call it a "bailout," needless to say. There is concern about dealing with the housing industry more aggressively. There is a lot of sympathy for [Chairman] Sheila Bair's leadership at the FDIC on that issue, because the sense is that until we stabilize the housing market and establish that floor on values or a solution consumers can feel comfortable with, we won't get the rest of the economy back. That's a missing piece.
      The other is a major economic stabilization package. Everybody's asking the banks to start lending again, and the banks won't at significant levels until they see housing values stabilized and the economy coming out of recession. At this point, they don't see a floor in values nor a date certain when the economy will at least level off. Our membership feels that will take a very large spend by the federal government – some combination of infrastructure and direct revenue sharing with the states.
      We were in Washington recently with the leaders of organized labor from New York and with the governor arguing for an economic stimulus package. Now, it won't happen until February, but the longer the delay, the slower the recovery process will be. In terms of the TARP [Troubled Assets Relief Program] package itself, the New York State Banking Superintendent was just named to the five-person panel appointed by Congress to oversee that process, and most people are pretty comfortable with how that's being managed. Overall, the sense is that the Treasury and the Federal Reserve have acted as aggressively and appropriately as anyone could have.

      SS: Can you tell yet if downsized workers in the financial industry are staying in the New York area or relocating?
      KW: It's a little early to tell. The Bear Stearns people are just now or recently hitting the streets. There's a lag time in terms of some getting severance; others are being hired elsewhere. It's hard to say. There is a lot of concern in New York that people will leave because there is a lot more talent than jobs at the moment. We've been working with the City to find people alternatives, to help develop a Web site with the City economic development office that will be offering everything from higher education opportunities to jobs in government and the non-profit sector. There are efforts to provide support for people who decide to take an entrepreneurial route with early stage capital investment and networking efforts to support them.

      SS: What are the long-term implications for New York as a financial center?
      KW: The good news is that our worries up until mid-2008 were about London, and today we know that everyone around the world is in pretty much the same boat. We're concerned short term about keeping the quality of services – police, sanitation, education and so on – in the city at a high level, because if we let that go at a time when tax revenues are down significantly, it will be a problem. [Moreover, New York City is having to pay companies more than $800 million in tax refunds that typically would be applied to future tax liabilities; New York State paid out $1 billion in 2008 to companies that overestimated their business taxes-Ed.]
      Drops in revenues, a lot of which comes from real estate transactions in our state – taxes on transfer and mortgage recording tax and other large transactional taxes – have fallen off a cliff, as has sales tax. Income taxes will be down as Wall Street bonuses disappear – almost $2 billion in city and state income tax revenues came from those bonuses that will not be there. New York companies like Creditex Group will be the platform for making credit default swaps transparent. They have applied for and been accepted by the Federal Reserve Bank to provide that service. Bank of New York Mellon is the steward of the TARP funds, and many of our other institutions are participating as well.
      We aggressively want to be a part of designing the recovery. That will be key to retaining New York's status as the world's financial capital. The world will have to be working together on a new regulatory system and new transparency rules – new rules of the game. From that standpoint, we are confident that our long-term position will be good. The key is keeping the talent here.