Protectionist Sentiment Dominates US-China Investment Congressional Hearing

Last Thursday several members of Congress, representatives from the Securities and Exchange Commission, Department of Treasury, and several NGOs testified before the US-China Economic Security and Review Commission, a bipartisan congressional advisory panel. The full day hearing intended to examine the national security implications of investments made by sovereign wealth funds in the US. Unfortunately, it missed achieving this objective by a long shot. The testimony by several of the panelists was very one-sided. Fear mongering, conspiracy theories, and downright xenophobia were the major themes that won the day.

The panelists’ prepared statements can be accessed here: (US-China Economic Security and Review Commission)

Some of the highlights:

Linda Thomsen, director of the SEC’s Division of Enforcement suggested that SWFs pose an insider trading risk (Securities and Exchange Commission):

…sovereign wealth funds, like hedge funds, have, by virtue of their substantial assets, substantial power in our financial markets. However, in addition to this financial power, sovereign wealth funds, unlike hedge funds, have power derived from being governmental entities, which may give them access to government officials and information that is not available to other investors. There is the potential for these powerful market participants to obtain material non-public information, either by virtue of their financial and governmental powers or by use of those powers, to engage in illegal insider trading using that information.

I understand the issues that the SEC is concerned with. It’s their job to be vigilant about insider trading risks. But it’s important to point out that any investor can legally have as much access as they want to government officials by simply hiring a lobbyist. The lobbying system in the US puts the onus on each individual party (government official, lobbyist, client) to not do anything illegal. If we want to be objective, then SWFs and their governments should be held to the same standards as everyone else. Also, it’s not fair to say that SWFs, who to my knowledge have not been involved in any investment scandals, are guilty until proven innocent while hedge funds, mutual funds, investment banks, ratings agencies, and lobbyists are given the benefit of the doubt even after being mired in scandal after scandal. To suggest otherwise seems needlessly conspiratorial.

Senator Jim Webb argued that that passive, minority stakes taken in US corporations by SWFs posed national security risks (U.S.-China Economic and Security Review Commission: Webb testimony):

All proposed foreign investments that have national security implications are potentially subject to review by the Committee on Foreign Investment in the United States. I have been particularly concerned regarding passive investments that may nonetheless provide foreign governments and state-owned corporations with control over sensitive national security information.

 

Holding a small minority of shares or not taking a board seat does not provide a guarantee that there will be no influence or control. For example, Saudi Prince Walid Bin Talal, who holds a 3.9 percent stake in Citibank, was closely consulted in the ouster of Chuck Prince from Citibank as its CEO. Prince Bin Talal does not sit on the board. You do not need a seat on the board, however, to have a seat at the table.

 

Prince Bin Talal has invested his money, not his government’s, and he is held up as a responsible and conscientious investor. The Prince’s role in another Prince’s ouster, however, speaks volumes to those who suggest that you need to be on the board to exert influence.

I don’t think the comparison Webb is making here is particularly relevant. Prince al-Walid is a private investor, so Webb is not comparing apples to apples. Further al-Walid has had a long relationship with Citigroup and most of the senior managers there. Comparing al-Walid to a SWF doesn’t make any sense, but if Webb wanted to be less transparent he could have examined the relationship between al-Walid and the rest of his portfolio holdings, which include substantial minority stakes in dozens of US companies. If all Webb was trying to do was say al-Walid is a foreigner, foreigners run SWFs, so all foreigners will exert influence, then mission accomplished. Of all people, Jim Webb should know better than to use this card.

The Treasury Department has thus far been the voice of reason in the debate over SWFs and played that role again at the hearing (Forbes):

Robert Dohner, deputy assistant Treasury secretary for Asia, told the panel. “There is a risk that the rise of sovereign wealth funds could provoke a new wave of investment protectionism, which would be very harmful to the global economy,” Dohner said. “Protectionist sentiment could be partially based on a lack of information and understanding of sovereign wealth funds, in part due to a general lack of transparency and clear communication on the part of the funds themselves.”

Forbes goes on to make some of the most important points that were inconspicuously absent from the debate at the hearing last Thursday:

(Sovereign wealth funds) see themselves as passive, long-term investors, driven solely by the need to make a good return on their country’s surplus cash.

 

That mostly is their track record, but their Achilles’ heel is their perceived lack of transparency and a persistent concern that they will be motivated by more than just market considerations, which provides ammunition for the conspiracy theorists among their critics and feeds the forces of protectionism stirring in this U.S. presidential election year.

 

At Davos, Bader al-Saad, managing director of the Kuwait Investment Agency, the oldest sovereign wealth fund, which has had a stake in Daimler since 1969 and BP since 1986, politely but pointedly noted, America’s own hedge funds and bond-rating agencies are perhaps equally deserving of such a code.

 

But logic has little to do with this debate.

Major Sovereign Wealth Funds Deals through January 2008

According to Thompson Financial via Gulf News:

 

News Roundup (6 February 2008): Temasek/Tui deal; No SWF for India?; Japan looking to thwart China; Saudis to be modest

Slow news week and I’m swamped at work so not much news analysis this week. I’m working on a few substantive pieces that I hope to get up as soon as things calm down, possibly this weekend.

Temasek merger with Tui

Germany doesn’t seem to have the same issues that the US does with allowing foreign entities to own transportation infrastructure (Financial Times):

Temasek, the sovereign wealth fund, and Germany’s Tui are in talks to merge their shipping operations in a deal that could see the Singaporean group take a stake of more than 20% in the Hanover-based travel group.

India not in a good position to start SWF

Echoing some of my own thoughts on the possibility of an Indian SWF (LiveMint):

Unlike established SWF rivals, India’s reserves are not a result of high commodity prices or excess savings. The country runs a current account deficit of 2% of gross domestic product (GDP). It needs to keep a fair amount of cash on hand just to ensure that trade keeps flowing.

More important, India is still very poor and crying out for investments. Investment accounts for 33% of GDP in India, far below China’s 43%.

The government recognizes the problem. Its latest Five-year Plan includes $492 billion of infrastructure spending, but it expects the private sector to come up with two-thirds of the cash. It would make sense to use any extra unneeded foreign currency to increase the government’s share.

In the long term, the returns on even modestly well thought out domestic investments will surpass those earned by a sovereign wealth fund.

Saudi reconsidering plans for SWF

Much larger country than the other commodity-based SWFs, much more political unrest, couple that with the Western backlash to SWFs, the risks of having a SWF seem to outweigh the rewards for Saudi. Especially, when they can at any point ‘appropriate’ a larger portion of any excess reserves to members of the royal family (Business Week):

Don’t expect Saudi Arabia to be a big player in the Sovereign Wealth Fund space. That was the message from a senior Saudi financial official I encountered recently. He said Saudi Arabia was considering a modest fund of around $6 billion.

Japan wants global SWF ‘rule book’ for protection from China

China Development Bank is attempting to ‘dominate and control’ the Japanese steel industry. Any global rules or regulations on SWFs are likely to be voluntary so I don’t think Japan would get much protection from those. It will be interesting to see how this plays out (Times Online):

“We need governments everywhere to come together to make rules that would prevent the disorder caused by these funds,” Hajime Bada, president of the Japan Iron and Steel Federation said. “Some countries are using their state funds to dominate certain industries.”

Japanese steelmakers see the impending bidding war for Rio as a crisis in the making, with potentially devastating iron ore pricing power going to BHP Billiton or, worse, to an aggressive Chinese player with the financial backing of the State. Caught between what it sees as “two worst-case scenarios”, the Japanese steel industry is pinning its hopes on government intervention.

From Russia with NO Love: A New Sovereign Wealth Fund

Russia officially announced that it’s splitting the Oil Stabilization Fund into two separate entities (International Herald Tribune):

The larger of the two funds, now called the Reserve Fund, retains the initial purpose of the Russian rainy day fund of insuring the country’s budget against a steep fall in oil prices. It will hold $125 billion and be maintained in future years at a size that is roughly 10 percent of Russia’s gross domestic product, as it is now.

 

The other, called the National Welfare Fund (NWF), with $32 billion, is intended to buoy the pension system. Under a law passed last spring, it can be invested in foreign stocks and bonds.

Morgan Stanley, in a report titled, “Celebrating the Birth of Russia’s SWF,” (PDF) says that the NWF will initially invest conservatively:

…for now, the NWF will initially be invested very conservatively, with the following guidelines:

 

(i) All must be in foreign debt, denominated in USD, EUR or GBP, rated at least AA-, from Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands, Spain and the US.

(ii) At least 50% in foreign government debt, with the rest in foreign private/corporate debt.

(iii) Up to 30% in foreign agency debt and central bank debt.

(iv) Up to 15% in debt of international financial organisations (ADB, EIB, etc.).

(v) Up to 30% in foreign bank deposits.

Morgan Stanley estimates that if oil remain at current levels the NWF could reach $320 billion in the next 5 years, with their best guess being $140 billion.

The rhetoric coming from political leaders in the Russian government announcing the NWF does not seem like the most diplomatic, tactful way to announce the creation of a new SWF, especially given the concerns over possible political motivations that certain SWF host countries might have (Financial Times):

Dmitry Medvedev, Russia’s most likely next president, called on Russian business people on Thursday to copy China and go on a global buying spree of foreign companies to bolster the economy and cut dependence on technology from abroad.

 

In his first speech to Russian big business since being named by Vladimir Putin as his preferred successor, Mr Medvedev pledged Kremlin support for companies seeking assets abroad.

 

“This is a very important task. The majority of powerful countries are engaged in this. Many of them are very active, like China. And we should be active, too,” he told a conference for Russia’s most influential business lobby in the southern Russian city of Krasnodar.

 

“This will allow us to re-tool Russian enterprises with technology, boost their production culture and grant them the opportunity to diversify investments and win new markets,” he said.

Remarkably, Russian finance officials are puzzled at why the NWF is being singled out for criticism (Financial Times):

Pyotr Kazakevitch, the 34- year-old head of the Russian Finance Ministry’s $127.5bn stabilisation fund, is puzzled by the fears in the west about the threat posed by sovereign wealth funds.

 

“The sovereign wealth funds of the Arab world and Singapore have been buying equities in Europe and America for decades and there was no discussion at all,” Mr Kazakevitch told the Financial Times. “I find it really strange that when Russia only starts discussing such a possibility we hear a lot of concerned speeches … I don’t understand why we hear a lot of voices that demonize our activity.”

Russia has disclosed a fairly robust governance structure for the NWF (see Morgan Stanley report (PDF)). The Ministry of Finance will manage the NWF. The Ministry will publicly report monthly, quarterly, and annually on government accumulation, investing, and spending of the NWFs capital. It has also announced pretty clear investment guidelines and objectives (see above).

The rhetoric coming out of the Kremlin leaves a lot to be desired with regards to motive and the potential for politicization of the NWF, but I think it would be best for financial markets, regulators, and government officials to err on the side of not rushing to judgment. Despite what Russian political leaders are saying, the Ministry of Finance has, on its’ own volition (which is the key with SWFs), created a relatively transparent and accountable SWF.

Russia’s leaders would do well to follow China’s example and put on a PR blitz to highlight the NWFs governance structure and assuage some of the regulatory, governmental, and financial communities’ concerns (New York Times):

The head of China’s $200 billion government investment fund, seeking to reassure Americans nervous about the possibility of foreign takeovers, said Thursday that China would invest mostly in portfolios rather than individual companies — except when a “big fat rabbit” like the investment banker Morgan Stanley came along.

 

Mr. Lou, a former finance ministry official in Beijing, was on a visit to the United States to tell American officials that China had no intention of gaining controlling interest in any companies, and that it would be a “good corporate citizen” and not invest in companies that damage the environment, waste energy or produce tobacco.

 

He said he understood that Americans “have concerns about the size of our capital and also people have concerns about our motives” but that his fund was established to invest part of China’s estimated $1.4 trillion in foreign exchange reserves, most of which is in dollar-denominated Treasury securities, to meet Chinese monetary policy needs.

 

Echoing what he said was a pledge by Prime Minister Wen Jiabao, Mr. Lou said that the Chinese government would not interfere in the operations of the Chinese fund or dictate its investment decisions, and that the fund would have its own corporate governance structure.

Weekend Links (2 February 2008)

Some recent articles of interest:

• Bond crisis: Sovereign funds hold their bets (Fortune)
• US Treasury’s Kimmitt stresses benefit of commercially-based SWFs (CNBC)
• OPEC rebuffs call for increase in output (Financial Times)
• IMF’s proposed sovereign wealth fund code ruffles feathers (Bretton Wood’s Project)
• China Investment-Fund Head Says Focus Is on ‘Portfolios’ (Wall Street Journal)
• State-led globalization (RGE Monitor)
• Libya Sovereign Wealth Fund to Shun U.S. (Bloomberg)
• Market convulsions will lead to the return of the state as a major economic force (The Independent)
• Japan’s Nukaga: No plan for sovereign wealth fund (Reuters)
• Ask the Author: A World Without Islam (Foreign Policy)
• The ‘war on terror’ licenses a new stupidity in geopolitics (Guardian Unlimited)
• A Risk Index for Sovereign Wealth Funds (Breaking Views)
• After Iraq: A report from the new Middle East—and a glimpse of its possible future (The Atlantic)
• If $28 Trillion Comes Knocking, Open the Door (Bloomberg)
• Can Emerging Markets Avert U.S. Chill? (Wall Street Journal)
• (Stephen) Roach Says He’s `Optimistic’ on Asian Growth (Bloomberg)

Stay up to date with latest sovereign wealth fund news and developments by subscribing to ExcessLiquidity.org’s RSS feed: http://sovereignwealthfunds.wordpress.com/feed/.

News Roundup (30 January 2008): Citigroup chief says Chinese, Russian sovereign funds are top worry; Qatar buys stake in Credit Suisse; Indian SWF?

Concerns over China, Russia SWFs

At a recent finance conference in Brussels, Citigroup chairman Win Bischoff had a very interesting exchange with a German EU parliamentarian (Martketwatch):

“It is the China and Russia syndrome of sovereign wealth funds that is most concerning,” Bischoff told a finance conference in Brussels.

 

China and Russia are the main concern in the debate over whether to regulate state-backed investments, German member of the European parliament Wolf Klinz said. He said German companies are worried that China will steal its intellectual property and fear that Russian President Vladimir Putin wants to use investments “as a political instrument.”

 

“Yes, that’s a very good point,” Bischoff said, nodding at Klinz’s remarks.

Bischoff’s comments are particularly interesting because his firm has recently had several SWF investments approved by the Committee on Foreign Investment in the United States (CFIUS). I would imagine that he is familiar with what the US government’s main concerns have been with SWF investments.

Qatar likely to buy 5% stake in Credit Suisse worth $3 billion

The deal hasn’t been finalized and the stake could be slightly higher or lower. The interesting part of this deal is that Credit Suisse is not publicly recognized as having large subprime related losses, like all the other banks that recently received SWF capital infusions (Marketwatch):

Other than a $1.9 billion writedown related to the sub-prime crisis announced in November, the bank has so far emerged comparatively unscathed from the credit crunch. Sovereign wealth funds from Abu Dhabi, China, Dubai, Singapore and Kuwait have snapped up large stakes in banks such as Citigroup, Merrill Lynch, Morgan Stanley and UBS as they wilted under the weight of huge losses related to the implosion of the U.S. sub-prime mortgage industry.

See more on what the Qatar Invesmtent Authority has planned for the future in this interview chief executive Hamid Al-Thani gave to CNBC at the World Economic Forum last week (Dealbook).

India looking into creating a SWF

Indian government officials have SWF envy (The Economic Times):

While Sovereign Wealth Funds (SWF) owned by big Asian economies invest in assets the world over, Indian policymakers too are looking at whether the country needs to float such a fund. The finance ministry is planning to set up a committee to examine the pros and cons of an Indian sovereign wealth fund.

I’m not sure how much fiscal sense a SWF makes for India. The country is far less developed (infrastructure, education, basic health care, etc) than China and other export-oriented countries with SWFs, doesn’t have an abundance of natural resources, and is a democracy which means the government would likely be held accountable for the fund’s performance. How would the Indian government react to the public backlash from an investment gone bad a la the China Investment Corp/Blackstone deal?

More than a third of India’s population lives in poverty, while in China the percentage of the population living below the poverty line has fallen into the single digits; in absolute terms this is a difference of several hundred million people. How would the Indian government react to hundreds of millions taking to the streets and protesting a government that, from their point of view, is neglecting their dire condition to bailout a foreign investment bank? I just can’t see how there wouldn’t be an immediate change of policy if this type of situation arose in any democratic country, let alone poverty stricken India.

GCC dollar peg, inflation update

Qatar is considering following in Kuwait’s footsteps and dropping the dollar peg (Financial Times):

Qatar is reviewing its currency policy and could revalue or drop the dollar peg as the booming Gulf state struggles to tame inflation while the US reduces interest rates to head off a recession. Qatari officials on Wednesday said the gas-rich emir­ate was considering revaluing its currency or linking it to a trade-weighted basket of currencies as well as other policy proposals aimed at cooling rampant inflation of up to 15 per cent.

Inflation reeking havok on GCC businesses (Arabian Business):

More than half of Gulf businesses have been badly hit by rising inflation, with costs increasing faster than they can be passed on to customers, an ArabianBusiness.com survey has revealed. With inflation rising across the GCC, and predicted to hit a 20-year high of 12% in the UAE this year, 62.5% of respondents to the poll said the price of goods was rising too fast to be passed on.

Sovereign Wealth Funds ‘It’ Topic at 2008 World Economic Forum

2 years ago at the World Economic Forum the hot topic of conversation was hedge funds. Last year, it was private equity. This year, sovereign wealth funds were the ‘it’ topic at Davos.

In a session titled, “Myths and Realities of Sovereign Wealth Funds” a panel moderated by the Financial Times’ Martin Wolf debated and discussed most of the issues making headlines in recent weeks (centering primarily on the topics of transparency, objectives, motivations). The panelists included Lehman Brothers CEO Richard Fuld, Kristin Halvorsen of Norway’s GPF, Muhammad Al-Jasser of the Saudi Arabian Monetary Agency, Russian Finance Minister Aleksey Kudrin, Bader Al -Sa’ad of the Kuwait Investment Authority, Blackstone CEO Stephen Schwarzman, former US Treasury Secretary Larry Summers, and current US Deputy Treasury Secretary Robert Kimmit. Video of the hour-long session below:

Noteworthy comments that were made by the panelists (Reuters):

ALEXEI KUDRIN, DEPUTY PRIME MINISTER AND FINANCE MINISTER OF RUSSIA:

“When there was a period when traditional economies had strong funds and through several funds moved into markets and bought industries, we did not speak of restricting capital.

“Now (it is the other way around) we are having discussions about the aim of investment.

“It’s an interesting discussion – there is no cause for concern, but we are discussing a code of practice. Perhaps we are ahead of ourselves.

“So far, we have not identified any negatives but we are already talking about a code to protect us. Let’s first define what could give rise to concern.”

ROBERT KIMMITT, U.S. DEPUTY SECRETARY OF THE TREASURY:

“At this point, the history with sovereign wealth funds is they are generating higher investment returns without generating political controversy.

“Importantly, both fund management and investment decisions we have seen have been made on commercial not political grounds. We welcome that kind of investment in the United States. We don’t fear such investment.

“However, the growth in the size and the number of these funds is such that vigilance is required.

“Since Dubai Ports World, we have had over 200 cases that have come through the Committee on Foreign Investments in the United States — none of those has been blocked.

“The new investment law passed last July and further implemented by an executive order passed just yesterday…has struck a better balance on investment review between encouraging investment and protecting national security.”

LAWRENCE SUMMERS, FORMER U.S. TREASURY SECRETARY

“I would agree that the world is a better place because of those transactions that have taken place over the past three months. There’s not much that sovereign funds (have done) to date that one can be critical of.

“I do think there is potential grounds for concern here.

“Given we have made a decision that we are not going to invest our country’s money in companies because of the risk of politicisation, then it’s legitimate to be concerned about other countries’ use of those funds.

“The question is if we believe in market economies and we work very hard to create open markets and private enterprise — shouldn’t we be concerned with transactions that have an element, albeit a small element, of cross border nationalisation?”

STEPHEN SCHWARZMAN, CHAIRMAN AND CEO OF BLACKSTONE GROUP:

“Our experience with sovereign wealth funds is they are smart, long term, highly professional. All they are looking for is higher rate of return.

“We have a sovereign wealth fund as our largest stakeholder. It is indicative of the way a sovereign wealth fund would think. The first thing about that investment is it is a non-voting investment – that was important for them.

“We had originally asked them to vote with us, and they’d said they (would rather not). They are also a long-term shareholder.”

KRISTIN HALVORSEN, NORWEGIAN FINANCE MINISTER:

“The fund is an extremely long-term investor. In principal we are going to be shareholders forever. We are extremely transparent. Our investment guidelines are discussed in parliament each year.

“We have a very long-term horizon and that is not only to stabilise the Norwegian economy but also to stabilise global economy. We have ethical guidelines, to avoid our investments contribute to unethical acts. We are exercising these guidelines through our ownership rights.”

MOHAMED AL-JASSER, VICE GOVERNOR OF SAUDI ARABIAN MONETARY AGENCY:

“They have always taken a long-term stabilising role in financial markets.

“I don’t think there are any difficulties in understanding who is investing where. Regulators… make sure it is well-known and compliant with regulations.

“We should not look at sovereign wealth funds as a risk and a danger.

“Between the years 1983 and 2002 we had 20 years of budget deficits. “We need to provide oil for the world economy. We have managed that well for the sake of our economy but also for the sake of the global economy.

“Basically we’re trying to address a hypothetical situation — we’re talking about trying to regulate something that may happen.”

Al-Jasser said when there were similar calls for regulation on hedge funds the response was that would disrupt financial markets.

BADER AL SA’AD, MANAGING DIRECTOR OF KUWAIT INVESTMENT AUTHORITY:

“There is a lot of worry about sovereign wealth funds, but all of them are assumptions, they are not about real cases.

“Kuwait has been a shareholder in DaimlerBenz since 1969, it has probably been one of the most stable shareholders.

“Kuwait investment authority has one of the most regulated investment authorities. It is really well governed.

“For 55 years, we never had politically enforced decisions for our investment.

“We look at the bottom line, we don’t look at anything else. We have been passive in all our investments. We haven’t been active in any of our (holdings). All this fear about sovereign wealth funds has no real basis.”

Related stories of interest:

• Growth of soveriegn wealth funds seen as positive development (World Economic Forum official press release)
• SWF Seeks Loving American Man: The hottest session at Davos is about … sovereign wealth funds? (Slate)
• Sovereign wealth funds seek balance against Western regulation (International Herald Tribune)
• Who’s afraid of sovereign wealth funds? (BBC)
• SWFs belle of the ball at Davos (Arabian Business)
• Davos 2008: Policymakers clash over sovereign wealth funds (Times Online)
• Wealth Funds Hear Disclosure Warnings in Davos (Bloomberg)
• Saudi, Kuwait Resist Sovereign Fund Code of Conduct (Bloomberg)
• Foreign Capital Must Not Be Blocked (Financial Times)
• Sovereign Wealth Funds: Guilt until proven innocent? (Reuters)
• Sovereign Wimp Funds (Wall Street Journal)
• Blackstone CEO: Sovereign, pension funds the same (Pensions and Investments)

My take:

The overall discussion was relatively balanced. The only complaint that I have is minor. I would have preferred to see some representation from the Southeast Asian, export surplus-orientated SWFs on the panel. I thought the format was really good and that Martin Wolf did an excellent job moderating (not surprising, his FT columns are also excellent).

Larry Summers hypothetical examples, while certainly plausible to debate in theory, have never even shown signs of manifesting in reality and are thus not fair to argue beyond the abstract. Several of the panelists made the prescient point that it wasn’t fair to call for regulation and transparency for SWFs while not holding other large investors such as hedge funds and private equity firms to the same standard, especially considering that the former has had a destabilizing effect on the global financial system time and time again. I suspect that the people making the calls to regulate SWFs and make them more ‘transparent’ are smart enough to know this. There’s something else, something much larger at work here that I’m going to take an in-depth look at in my next commentary piece.

News Roundup (23 January 2008): US SWF backlash; Gulf response to US rate cut; China being patient; Abu Dhabi clean energy initiatives

US backlash to recent investments by sovereign wealth funds

Citigroup and Merrill Lynch are viewed more negatively by the American public on the heels of investments each firm accepted from SWFs (Financial Times):

Citigroup and Merrill Lynch’s standing among US citizens has plummeted as a result of multi-billion dollar capital injections by sovereign wealth funds, according to new research that highlights simmering public opposition to investments by foreign governments.

 

Over half of the 1,000 people polled by the market research group Strategy One said they “trusted Citigroup less” after its recent decision to tap Middle Eastern and Asian sovereign funds to ease its financial constraints.

 

In Merrill’s case, 45 per cent of the respondents said their trust in the bank had fallen since hearing of investments from foreign state funds, according to the research to be published on Tuesday.

The poll draws attention to the rising protectionist sentiment among the American public, which is in part being stoked by politicians like Hillary Clinton:

The new research – carried out early this month between the two waves of foreign investments in Citigroup and Merrill – also points to an underlying current of protectionism within the US public, which could be exacerbated by the rising threat of a recession.

 

“The Citigroup figure is staggering,” said Laurence Evans, president of Strategy One, which is owned by the public relations group Edelman.

 

“There is a xenophobic element to it. The biggest concern is uncertainty: people don’t know how much influence sovereign wealth funds will have.”

Gulf response to US rate cut

Gulf central banks, whose currencies are pegged to the US dollar, have decided to follow the US Federal Reserve’s 75 basis point interest rate cut with reductions of their own (Arabian Business News):

“The Gulf will have to match the Fed cut,” said Marios Maratheftis, regional head of research at Standard Chartered Bank. “This is going to create even more liquidity in the market which means more inflationary pressures.” Inflation in four of the six Gulf Arab oil producers has overtaken official lending rates, encouraging borrowing for investment in assets such as real estate, which is the main driver of the surging cost of living across the region.

Gulf Cooperation Council (GCC) central banks say that they remain committed to the dollar peg for now, but will leave the door open for coordinated currency revaluations in the future, to tackle rising inflation.

China in no hurry to buy credit crunch bargains

China is taking a more cautious approach to making investments on the belief that the worst of the subprime crisis is still yet to come (Reuters):

Beijing’s reluctance to buy into Citigroup coincides with growing expressions of concern by Chinese officials about the seriousness of the credit crisis. “The subprime loan issue has planted a ticking timebomb in the global financial markets. It now seems the impact is much more serious than the market had previously expected. I don’t think it will be over any time soon,” Vice-Finance Minister Li Yong said at a recent forum.

Abu Dhabi announces $15 billion clean energy fund, world’s first carbon neutral city

Abu Dhabi decides to invest in the energy technologies of the future (BBC):

The government of Abu Dhabi has announced a $15bn initiative to develop clean energy technologies. The Gulf state describes the five-year initiative as “the most ambitious sustainability project ever launched by a government:”. Components will include the world’s largest hydrogen power plant. The government has also announced plans for a “sustainable city”, housing about 50,000 people, that will produce no greenhouse gases and contain no cars.

What is a Sovereign Wealth Fund?: A Working Definition

The Council on Foreign Relations (CFR) has put out a very useful backgrounder on sovereign wealth funds.

In an attempt to define SWFs, the CFR gives a very generic definition, based primarily on the definition given by the US treasury:

Sovereign wealth funds, as defined by the U.S. treasury (PDF), are government investment funds, funded by foreign currency reserves but managed separately from official currency reserves. Basically, they are pools of money governments invest for profit.

Morgan Stanley, in an October 2007 report titled, “The Definition of a Sovereign Wealth Fund,” (PDF) argues that there is no universal definition of a SWF, but an investment vehicle can be classified as a SWF if it has the following 5 characteristics:

• Sovereign;
• High foreign currency exposure;
• No explicit liabilities;
• High risk tolerance;
• Long investment horizon.

In his Foreign Affairs article on the role of sovereign funds in the world economy titled, “Public Footprints in Private Markets,” former US deputy treasury secretary Robert Kimmitt notes that there are primarily 4 different ways in which countries can hold sovereign wealth:

• Sovereign wealth funds;
• International (or official) reserves (typically sovereign bonds in large, liquid and very low-risk markets);
• Public pension funds;
• State-owned enterprises.

The Morgan Stanley report goes on to add that there is a significant degree of overlap between the characteristics of SWFs and the other methods in which sovereign wealth is held, with the main differences falling primarily along the lines of risk tolerance and investment horizon.

Taken in sum, these 3 sources provide an excellent overview of the basic features of SWFs, and a good working definition of the term “sovereign wealth fund”.

Jim Cramer: ‘Financials earnings are fiction! Where’s the SEC, Department of Justice?!!!’

As only he can, Cramer passionately describes how and why the subprime mess happened:

As someone who has worked in the structured finance industry, I must say that he is not too far off on some of the things he says about the bond insurers and rating agencies.