Sovereign Wealth Funds

My position on Sovereign Wealth Funds (“i” before “e” except after “c” and in “sovereign” – very confusing) has hopefully-consistently been with regard to their potential for destabilisation. I don’t trust them any less – in fact, probably more – than hedge funds. Mostly because I would expect Sovereign Wealth Funds for most nations to (a) take very long and stable positions, and (b) take very solid and far-horizon’d positions specifically when, say, bailing out banks in tanking developed markets.

This was reinforced when I was discussing the matter with a colleague from Saudi Arabia, and who works within their finance ministry, and who worked within the setup for the Gulf Common Market. As far as he was aware, there was little more at work in the gulf funds than taking up cheap exposure in foreign financial markets. I still distrust, say, Chinese Sovereign Wealth Funds (because their government has stated publicly their willingness to do things like push economies around when beneficial).

At Davos, it seems, the issue looms large:

The funds are controversial in countries like the U.S. because they already have a lot of firepower, and it is growing fast thanks to high oil prices and U.S.trade imbalances. Richard Fuld, chairman and chief executive officer of Lehman Brothers (LEH) said the wealth funds, whose present value he pegged at as much as $3 trillion, could command as much as $20 trillion in five years. “The impact will be huge,” he said, though he noted pension funds command some $60 trillion.

While few U.S. and European politicians have raised objections to the large stakes various funds have taken (BusinessWeek.com, 12/7/07) in blue chip U.S. and European banks such as Citigroup (C), Morgan Stanley (MS), Merrill Lynch (MER), and UBS (UBS), greater tensions may well be brewing as the funds grow larger and more ambitious. The notion of foreign entities buying up blue chip assets goes against the grain in the U.S. and other Western countries. Perhaps the greatest danger arising from the huge growth of these funds isn’t that they will buy strategic assets in the U.S. and elsewhere, but rather that they will trigger a wave of protectionism that could gum up the international financial system.

One of the interesting things about them is that, while hedge funds and equity groups were ‘ours’, we have no money for a Sovereign Wealth Fund (or we did, but we blew it in Iraq). So we have at best a small seat in the room – probably not at the table. That frightens us. I like the idea, though, that non-US/EU Sovereign Wealth Funds are bad because of our protectionist reaction to them. Are we seriously suggesting that the Gulf, China and Russia have to save us from ourselves? Sit by while we continue in smugness with our business as usual.

We’ve been trying for a while now to make OPEC bend itself to our macroeconomic convenience. It’s probably time we just stopped trying.

Only briefly seen was this sort of response:

Muhammad al Jasser, the deputy governor of the Saudi Arabian Monetary Agency, the central bank, which manages most of Saudi Arabia’s overseas assets, was more relaxed. But he brushed off Summers’ suggestion that the funds would be wise to adopt a good-conduct code to ease worries, claiming there has been huge resistance in the U.S. to regulating hedge funds and rating agencies—even those “who created turmoil in the world economy.”

He might also have reminded us that the money controlled by Sovereign Wealth Funds currently is still a lot less than the amount that said turmoil is going to cost the world economy (how much, already, in central bank intervention money, has it cost? A few Sovereign Wealth Funds’ worth, certainly).

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3 comments so far

  1. cashman moneymaker on

    you know, the pursuit of money and the greed that goes with will eventually kill us all

  2. James Scott on

    Its interesting getting an economists point of view of SWFs. The politics is starting to heat up, with a presidential election this year and the economy going into the doldrums, it makes a perfect environment for having a go at the foreigners. Now that the hoo-har over globalization has simmered down and the peoples worry over exporting jobs to the developing world has become a thing of the past, will imported capital from SWFs become the next ‘big thing’? I hope not.

  3. zooeygoethe on

    I don’t know that the worry over jobs truly has – Edwards was always a little anti-NAFTA, and Romney’s stuff in Michigan was just plain odd.

    The cash from SWFs is sorely needed by the US at the moment, and probably moreso as rate cuts drive down the US dollar – lower rates means lower Foreign Lending, means lower US dollar (repeat). Look at the bail-out money that has come from the Gulf, already – that’s sovereign wealth. I’d be surprised if the US’ debt was this-much foreign-owned since your country was even founded (civil war, possibly). The pieces for a political issue are certainly already there.

    The drive for protectionism can be seen in Larry Summers’ arguments – the US is going to be very afraid of SWFs, because they represent an economic power that the US just doesn’t have/cannot wield.

    There was an excellent FT editorial, discussing this:

    http://www.ft.com/cms/s/0/86e7d4fe-9f68-11dc-8031-0000779fd2ac.html

    The Brits went through the ignomy of “selling Britain by the Pound” – but they had no choice. At the moment, nor does the US.


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