Wednesday, June 4, 2008

What Are Sovereign Wealth Funds (SWFs) and Why I Care


Sovereign Wealth Funds (SWFs) are BIG funds of countries like Abu Dhabi, Kuwait and Saudi Arabia with lots of excess capital to invest because they're rich in oil revenues and want to diversify their wealth into every market sector, in every part of the world. SWFs are now the biggest, richest funds and players in the global financial markets, displacing institutions, corporations and individual mega-investors like Buffett, Gates and Soros as the biggest dogs in global finance.

And their preeminence represents an historic change in global markets that affect all of us and our economies.

What SWFs are and how they came into being is a subject worth our knowing about since they may soon own larger and larger chunks of our country's hard and soft assets. This week, U.S. Treasury Secretary Henry Paulson went to the Middle East where some of the worlds biggest SWFs are headquartered to stir up more interest in their investing in our U.S economy. Some might say Paulson went to beg these big SWFs to help bail us out of some of the current financial strains in our economy today, mostly a result of the devalued dollar policies of the past dozen years.

Why is Paulson approaching these SWFs, you ask? Eric Weiner writing in in Mortgaging America for the LA Times ( I hate to quote from such a liberal paper, so consider the source) gives his version:

"Today, the real power in international finance is held by rich countries, not wealthy institutions, corporations or private investors. And these countries are flexing their increasingly bulging muscles through investment vehicles known as sovereign wealth funds.

"Sovereign wealth funds, or SWFs, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it still was a British territory. After World War II, as Kuwait was negotiating independence, its leader, Sheik Abdullah al Salem al Sabah, asked the British to help him create a fund that would invest the nation's oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250 billion in assets and is one of the largest sovereign wealth funds in the world."

"As the British Empire crumbled, the government created similar funds for many of its territories and colonies (including the islands of Kiribati, which profitably exported guano for fertilizer). Meanwhile, other countries with growing wealth started setting up similar funds, such as the oil-rich nations of Saudi Arabia, the United Arab Emirates, Norway and Russia, as well as China, Singapore and South Korea, which had highly productive economies that also generated lots of excess capital.
"Still, it's only recently that SWFs have become major players on the financial stage. In 1990, the funds held just $500 billion in assets combined. Today, that figure is about $3.5 trillion. For comparison purposes, that's more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10 trillion, according to estimates by the International Monetary Fund."

Read the whole thing and let the implications begin to sink in. Weiner continues:

"The new power of SWFs has been on graphic display during our recent mortgage crisis. They've essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merrill Lynch took in about $11 billion from SWFs from Kuwait, Singapore and South Korea. And even august Morgan Stanley got $5 billion from China's SWF.

"These investments are steadying global financial markets by ensuring that none of these key banks goes under. But there are important questions to ask about the increasing influence that sovereign wealth funds have over our economy. As SWFs grow in size, they will be in a position to control large swaths of the global business world. That means foreign governments, which control the funds, will increasingly own sizable stakes in companies in such important industries as computer technology, aerospace and biotechnology.

"These kinds of investments raise "profound questions" of geopolitical power, as former Treasury Secretary Lawrence Summers pointed out a few months ago at the World Economic Forum in Davos, Switzerland. Summers' essential complaint is that there is no way of knowing if there is a political agenda behind a country's investment in these essential industries."The SWF's are by and large run by a collection of rogue states - dictatorships and pseudo democracies like: Abu Dhabi, dictatorship; China, communist dictatorship; Norway, western democracy; Russia, pseudo democracy; Singapore, dictatorship; Kuwait, dictatorship; Saudi Arabia, dictatorship; and Japan, pseudo democracy.

Should we care that these countries' SWFs are coming to the rescue of and bailing out American businesses and homeowners? I for one am a bit concerned that a short-term fix could turn out to be a long-term problem as in a loss of freedom and sovereignty for our country and its political process down the road. At any rate it's something I'm going to think and write more about in the months ahead.

1 comment:

Bob's Blog said...

and thank you for writing this initial post on the subject.