From his 34th-floor office in London's Docklands, the city's bustling new financial center, Michael Charlton has sweeping views of the glass-and-steel towers housing international banks and finance companies. In the distance, he can see the designated site of the 2012 London Olympic Games.

"We are an ideal location," says Charlton, the chief executive of Think London, the city's official agency promoting direct foreign investment. "We have high-tech infrastructure, an abundant pool of talent and easy access to the rest of Europe," he adds, ticking off London's many attributes as a world financial center. Is London the next global capital?

Charlton is biased, of course, but he isn't the only one singing London's praises. Over the past few years, growing numbers of U.S. companies, most notably banks and other financial-services institutions, have been moving some strategic operations to London. Why US bankers like London

General Electric recently announced that it was moving its consumer-finance unit, GE Money, to London -- the second GE division to cross the pond. (A health care unit is already there.) Meanwhile, Goldman Sachs, Lehman Bros., Citigroup and other major banks have been sending senior executives to head up operations in London, which is now a center for foreign exchange and derivatives trading.

International banks, many from Asia and the Middle East, have also established a presence in the city. Hedge funds are showing up, too, with an estimated 21% of global funds now located there. Smaller companies, many from emerging markets, are listing on the London Stock Exchange's Alternative Investment Market, or AIM. London has also become home to a new and lucrative financial-services industry: carbon trading. What is carbon trading?

As a result, many claim that London is giving New York a run for its money as the leading global financial capital. Moreover, some believe London's rise and rivalry with Wall Street reflect a wider trend in which many sectors of the U.S. economy are facing direct challenges from foreign competitors. Map: Global markets on the rise

Several factors have influenced London's ascendancy. Location is, of course, everything, especially in a globalized economy, and London is not only close to continental Europe but also in a time zone midway between North America and Asia.

That's one reason behind GE's decision this year to move the Money unit to London from company headquarters in Fairfield, Conn. "We feel we need to be closer to our customers, and the largest part of our business is in Europe," says GE Money spokesman Robert Rendine, who also notes that 80% of the unit's business is outside the United States.

Perhaps more attractive to financial companies is the United Kingdom's relatively lax regulatory structure, compared with the strict 2002 U.S. Sarbanes-Oxley Act. For small-capitalization companies seeking a stock listing without too much fuss, the London financial markets are increasingly appealing. As London pitchman Charlton puts it, in a not-so-subtle dig at the U.S., "We offer a business-friendly environment."

Other evidence suggests that London is gaining ground on New York as a favorite place to list new stocks: In 2005, initial public offerings on the London Stock Exchange and AIM totaled $55 billion, beating the $47 billion raised on the New York Stock Exchange and Nasdaq for the first time, according to a McKinsey & Co. report commissioned to examine the competitiveness of New York's financial market. In 2007, the London exchanges beat New York on the actual number of IPOs, but New York did manage something of a comeback: For the first time in three years the value of its IPOs outpaced London's, with New York raising $54 billion (compared with a still-impressive $52.2 billion on the London exchanges). What does Wall Street think?

For financiers, the familiar language and culture are important, too. "We speak English and American bankers like playing the English country gentleman," says Andrew Hilton, the director of CSFI, a London think tank financed by the city's financial institutions.

That's what carbon-trading companies, a fast-growing niche in financial services, found when they gravitated to London. In 2002, the U.K. government set up the world's first greenhouse gas-trading program, a decision that helped position London as the global center for carbon trading. Linked to the Kyoto treaty on the environment -- which was shunned by the U.S. but which came into force globally in 2005 -- and to a wider European Union program, the U.K. plan established a cap-and-trade system aimed at curbing greenhouse-gas emissions. It also made London the place to be for carbon trading: More than 80% of the $24 billion European Union's emissions-trading program takes place in London.

"The government took the lead in climate-change policy and wanted London to be a center for carbon trading," says Lionel Fretz, the chief executive of Carbon Capital Markets, one of the big players in carbon trading in the city.

Not everyone is convinced, however, that London is on an equal footing with New York -- or even poses a threat. "I consider London to be Avis -- they try harder -- but the depth is still in New York," says Kathryn Wylde, the chief executive of Partnership for New York City, a nonprofit that, according to its Web site, works to maintain the city's position as "the global center of commerce, culture and innovation." To prove her point, Wylde reels off some impressive numbers.

In 2007, $45 trillion worth of shares were traded on the NYSE and Nasdaq, compared with $10 trillion on the London exchange. And all those hedge funds you've heard about, with headquarters in London's swanky Mayfair?

In fact, last year New York extended its lead as hedge fund central: The number of $1 billion-plus funds grew to 139 from 123, with their collective assets rising to $881 billion, according to the partnership. (London lags in second place, with 79 $1 billion-plus hedge funds, ranging in value from $261 billion to $316 billion.)

Hilton, the London financial analyst, agrees that while London has gained in prominence as an international finance center -- and has taken some business from New York -- it pales in comparison to Wall Street's overall importance and clout.

"New York is streets ahead because that's where the big banks are and where the key decisions are made," he explains. "We look to New York for that."

Wall Street is also linked to the giant engine that is the U.S. economy, which Hilton notes is more powerful than Britain's "second- or third-tier economy on the fringe of Europe"--America's subprime debacle and credit crunch notwithstanding.

There are worries for Wall Street, Wylde acknowledges, including visa restrictions on foreign workers -- one reason companies are locating some senior executives in places like London. In the post-9/11 world, she insists, "We have to find a balance between vigilance and respecting investor needs and encouraging financial services to stay at the cutting edge."

Perhaps a truce is in order, suggests Matthew Cross, who runs Think London's New York office (yes, the Brits have parked their tanks on our front lawn).

Though London has siphoned some business from Wall Street, Cross allows, the debate isn't about one city overtaking another. Markets today are mobile, and money is always moving to the best place, he argues. "New York could just as easily pick up again and find volume increasing, or push ahead in a different area. And London could fall behind."

Instead, both cities should focus on meeting the needs of investors at a time when new financial centers in Asia and the Middle East have global ambitions. "As time goes on, if New York and London are not on their toes, they both will be at the mercy of China and India," Cross says. "Both cities are now mature money management centers, but who knows how long it will last?"

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Published July 18, 2008