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.