According to Thompson Financial via Gulf News:

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.

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.

Charlie Rose, hands down the best interviewer in the business, had Landon Thomas of the NY Times and David Enrich of the WSJ on his show last night discussing SWFs. They hit on most of the major themes (SWFs bailing out the US banking industry, reverse globalization, the SWF put) in the news recently (it’s the first segment, about 15 minutes long):

Enrich made an interesting comment about emails that he receives after writing articles about SWFs investing in US corporations. He says that many people complain about the US “selling out to foreigners” and “needing to learn Chinese and Arabic in the next ten years”. Thomas followed up by saying that there’s a xenophobic element in that type of criticism and the US isn’t as global as it thinks it is, especially when compared to places like London, Hong Kong, and Singapore. Hillary Clinton’s pandering at the last Democratic debate certainly speaks to these points.

The Economist’s cover story this week is a feature on Sovereign Wealth Funds.

The story gives a good overview of many of the basics such as size of SWFs, how they came about, how they’ve evolved, where they’re headed, and the issues facing SWF investing. It also includes a relatively balanced discussion on the motives of SWFs, which isn’t surprising as The Economist is probably the most fair and balanced mainstream publication around.

One point that The Economist makes, that has been completely absent from the mainstream debate thus far, is that the fear of politicizing foreign investments cuts both ways. The SWFs must be cognizant of possible retaliatory actions, such as asset freezes and/or asset confiscations, that can be taken against their investments for things such as political disagreements or court rulings that hold SWFs responsible for the actions of their host country’s citizens. The Economist cites the example of Britain forcing the Kuwait Investment Authority to divest from part of its’ stake in BP in the 1980s because Margaret Thatcher, in the midst of privatizing national assets, ‘was in no mood to see so much of a national treasure owned by a foreign government’.

Politicians scrutinizing the recent flurry of SWF investments should take care to remember that these infusions are in effect rescue capital that their government’s would likely be on the hook for had SWFs been deterred from investing, and that their own future geopolitical motives should be held to the same standard they want to hold SWFs to.

The article concludes, correctly in my opinion, by saying the chief threat that SWFs pose is that of financial protectionism and that it’s in the best interests of all parties to get along:

The hope is that both host countries and sovereign-wealth funds see that their interest lies in building confidence. The hosts stand to benefit from the funds’ capital. Meanwhile the funds are ruled by the politics of the places where they invest. You are only sovereign at home; abroad, someone else wields the power.

Citi, Merrill Raise $21 billion from SWFs

Citigroup announced that it will be accepting investments totaling $14.5 billion from the Government of Singapore Investment Corporation, the Kuwait Investment Authority, one of it’s largest current shareholders Prince Alwaleed bin Talal, former CEO Sandy Weill, and the New Jersey Investment Division. Merrill Lynch will raise a total of $6.6 billion from the Korean Investment Corporation, the Kuwait Investment Authority, and Mizuho Corporate Bank of Japan (Financial Times).

For Citigroup, the announcement of the capital infusion coincided with the release of a disastrous 4^th quarter earnings report and the revelation that things could get worse:

Citigroup also unnerved investors by warning of losses to come from consumer loans as it revealed a 40 per cent dividend cut, a $9.83bn fourth-quarter loss, $18bn in subprime-related credit writedowns and remaining exposure of $37bn to subprime mortgages.

Tomorrow, Merrill Lynch is expected to report a substantial loss and a possible subprime related writedown of $15 billion (Reuters):

Citigroup expects a $15 billion fourth-quarter write-down at Merrill Lynch and said CDO/subprime exposures will decline by 50 percent to 70 percent in aggregate.

Subprime Damage Report

The capital infusions that Citi and Merrill just received bring the total amount invested in banks and securities firms by outsiders (primarily SWFs) since the subprime crisis began last summer to $59.4 billion:

*In billions (USD)    Source: Bloomberg

Gulf to revalue currencies by April?

The countries of the GCC could revalue their currencies, which are currently pegged to the dollar, by April (Arabian Business News):

Gulf Arab oil producers could revalue their currencies together if the US dollar weakens further, with appreciations of 8% in the UAE dirham and Saudi riyal likely before April, Standard Chartered said on Wednesday.

 

Dollar pegs force the region to shadow US interest rates at a time when the Federal Reserve is cutting rates to contain a credt crisis and inflation is running at decade highs across the Gulf.

Some recent stories of interest:

• Gulf investments to jump as economies grow: (Bloomberg)
• China Investment Corporation’s strategy is becoming clearer:(IHT)
• How much of a discount did Temasek get for the Merrill stake?: (DealBreaker)
• Eastern investors getting bargains on Western financial companies: (Seeking Alpha)
• Kuwait fund focusing on long-term opportunities: (MSNBC)
• Qatar’s real estate king: (Portfolio)
• Are oil prices heading down?: (CNBC)
• Interesting maps of the world adjusted for size of oil reserves and exports: (Middle East Strategy at Harvard)
• Gulf states, not wanting to jeopardize economic boom, no longer want to isolate Iran: (Christian Science Monitor)