AS RECENTLY AS LAST FALL, in the middle of a worldwide credit meltdown that had nations everywhere scrambling to bail out their banks, it still seemed possible that Bay Street—the nerve centre of the Canadian financial system, touted as the most stable in the world—might come out of the crisis relatively unscathed.

Then came October. The job cuts started with GMP Capital, where 37 people were fired. Then AIC cut 53, Canaccord Capital 170 and CI Financial 60. Tip-of-the-iceberg stuff, one top-earning trader told me. We sat at the dining room table of his $10-million Rosedale home, watching the bad news on his wall-mounted, BNN-tuned plasma TV. The trader knew the big banks’ balance sheets were strewn with carnage, the result of declining stock portfolios and exposure to Wall Street bankruptcies. Three weeks later, Scotiabank announced its fourth-quarter profit was down by more than $890 million. Then CIBC confirmed that, after showing a profit of $3.3 billion in 2007, it would post a loss of more than $2 billion in 2008. It was hard to imagine how the big banks would avoid layoffs by the thousands. “Those cocky guys walking around Bymark saying, ‘I deserve a million five’ are finished,” the trader said. “The banks have been trying to reel in the bonuses forever. Now they can.”

As Bay Street goes, so goes Toronto. That bonus money circulates through the economy—houses, cars, boats, gardeners, nannies and no end of bling. Shrinking bonuses were only part of the problem: people’s investment portfolios, real estate holdings and retirement savings were dwindling before their eyes. This spring, cash-starved executives will all be trying to unload their Muskoka vacation properties, but there won’t be any buyers. And that would be only the beginning. Toronto’s financial sector employs—or did until recently—more than 300,000 people in this city, which makes it the third largest financial services centre in North America, behind only New York and Chicago. One out of every three downtown lawyers and accountants specializes in the industry; their work, and income, will dry up, too. All of which makes you wonder, What is the value of creating the world’s best managed, most stable financial system if it fails to act as a fiscal bomb shelter during market Armageddon?

And yet, even as the layoffs were beginning to pile up, industry representatives were sitting down with provincial officials in November in the Finance Ministry’s Frost Building offices on Queen’s Park Crescent with a plan to dramatically expand Toronto’s position as a global financial centre. The meeting was chaired by Janet Ecker, the former finance minister who is now president of Toronto Financial Services Alliance, a high-powered industry think-tank. They discussed lowering business taxes, making changes to immigration policy, and creating a single, national securities regulator. They even plotted how to make Toronto the headquarters of a new, international regulator, market regulation being the surest antidote to future calamity. If that happened, the world’s finance ministers, central bankers and financial CEOs would flow through this city, making it a true hub of the world economy and endowing Toronto with the prestige it has sought for so long. The global recession, rather than throwing cold water on the idea, made the growth of Bay Street look more promising. Worldwide market turmoil could be our lucky break—kind of like getting your dream home at a bargain price because the previous owner defaulted on his mortgage. Bay Street has the chance to turn the world’s rotten luck into Toronto’s good fortune.

THIS WOULDN’T BE THE FIRST TIME Toronto cashed in on another city’s financial devastation. Though it is synonym­ous with money, power and high rolling in this city, Bay Street was created by a mass stampede away from uncertainty, namely the election of the separatist Parti Québécois in November 1976. Separatism has since become such a staple of Canadian life (with its own political party in Ottawa, its MPs drawing salaries and pensions from Canadian taxpayers) that it’s hard to recall the panic that gripped the country, and especially Montreal’s business community, in the wake of separatism’s first election victory. Sun Life Assurance made a show of its exodus. Royal Bank, Bank of Montreal and others moved out quietly, department by department, over a period of years. Once in Toronto, the industry thrived, and the city now ranks consistently among the world’s top 20 financial centres. The September instalment of the Global Financial Centres Index, which is the industry’s gold-standard ranking of where money and power are located, showed that Toronto had jumped from 15th place to 12th, leapfrogging over Paris (which was in free fall, dropping from 14th to 20th), San Francisco and Dublin. Such financial centres as Boston, Sydney, Frankfurt and even Chicago were now within striking distance.

I met Ontario Finance Minister Dwight Duncan in his boardroom early one November evening. “I think it should be a goal for Toronto to rank among the top 10 in the world,” he said. More than any finance minister in recent memory, Duncan, with his heavy, neckless frame, looks the part of a stereotypical banker—albeit a banker in bad times, with dark circles under his eyes. He’d spent the previous week in the riding he represents, Windsor-Tecumseh, an area heavily dependent upon the auto industry. It’s starting to look like most of the 150,000 manufacturing jobs the province has lost in the past two years are gone for good. Ontario is now experiencing what the U.K. went through under Margaret Thatcher: a final, massive shift from manufacturing jobs to service jobs. In the new economy, Ontario doesn’t make stuff anymore. We let other places do that; our new job is to lend, invest, and manage people’s money.

That’s the idea, at any rate. The day I met Duncan, he had been trying to measure the increasingly faint pulse of an economy on life support: a lengthy morning phone call with his federal counterpart, Jim Flaherty, who updated him on the weekend’s G20 meeting in Washington, was followed by an impromptu afternoon meeting with the premier. Photographed portraits of Duncan’s predecessors hung on the wall. Given the unfolding situation, it wasn’t hard to imagine his face up there with his trademark red tie pulled tight above his head like a noose. But he is all smiles when it comes to the financial industry, which contributes enormous tax revenue. One lowball figure is $9 billion. “We build a lot of schools and hospitals with that money,” Duncan said.