As Wall Street falters, Washington's star rises

[Neil D]

By Daniel Trotta

NEW YORK (Reuters) - As Wall Street suffers through its worst slump in memory, New York City risks tarnishing its image as the city that drives America.

Waiting to fill the gap is Washington, home to a popular president and a Congress whose mood matches that of a public angry at Wall Street for losing people's retirement savings while doling out executive bonuses and raking in billions from taxpayer-funded bailouts.

The U.S. capital is more used to being viewed as the rather dull seat of government.

"There is a shifting of power and influence at the moment from Manhattan to Washington. The same thing happened during other financial crises in our history but most especially in the 1930s," said Kenneth T. Jackson, a Columbia University historian.

Jess Varughese, managing partner of financial services consultant Milestone, said Wall Street is worried about seeing its influence drift away while executives are demonized.

"It's something that we're all talking about every time we sit down with our industry counterparts and share a glass of wine or a cup of coffee," Varughese said.

Meanwhile, the fashion world may be paying more attention to Michelle Obama, President Barack Obama's wife, than any model on the catwalk, and last week's inauguration was a hotter ticket than any show on Broadway.

"I was in London with Mayor (Michael) Bloomberg in October and we were complaining to them about the action shifting to Washington and the executives in London said they were just as worried about it shifting to Brussels," said Kathryn Wylde, president of the pro-business non-profit Partnership for New York City.

"Private financial markets have collapsed and the government is absolutely in charge."

Washington will hold greater sway over banks and financial markets because of the government bailouts -- which some regard as shadow nationalization -- and increased financial regulation.

There is also a loss of power for New York within wider corporate America. The financial sector now represents 10 percent of the S&P 500 index against 22 percent in 2006.

"BUNCH OF IDIOTS"

Calling Wall Street "a bunch of idiots," Sen. Claire McCaskill of Missouri, a Democrat closely allied with Obama, said on Friday she was introducing legislation to cap compensation for employees of companies taking U.S. government aid during the economic downturn.

The proposed top compensation? The same as the U.S. president: $400,000 a year.

More than image is at stake. Obama may have branded the $18.4 billion in bonuses awarded to the securities industry in 2008 as "shameful" and the "height of irresponsibility," but it was still down 44 percent from $32.9 billion in 2007, a New York state report said.

New York State Comptroller Thomas DiNapoli said tax revenue could fall by nearly $1 billion in New York state and $275 million in New York City from lower 2008 bonuses at a time when the city and state are slashing spending to meet budget gaps.

"I for one am not going to be advocating eliminating those bonuses at the expense of hurting New York City's budget and New York State's budget because that would just have a ripple effect," said City Councilman David Weprin, chairman of the finance committee.

"I can understand the psychological effect that bonuses should not be paid out of federal aid. But there's other ways that the bonuses can be paid. It shouldn't be directly attributed to the bailout money."

It may have taken outrage over financial institutions paying for executive junkets and corporate jets while taking bailout money, but Wall Street has heard the message.

"I don't think there's going to be anybody left on Wall Street that goes into 2009 without a very sober view of compensation," Varughese said. "The message has gone through that it must be directly related to the results of the firm."