U.S. Officials: Sovereign Wealth Funds Not Harmful

MoneyNews
Thursday, March 6, 2008
WASHINGTON -- Sovereign wealth funds, which have drawn criticism for recent multi-billion dollar injections into battered U.S. banks, are a good thing but could be more transparent, senior U.S. officials said on Wednesday.

"Sovereign wealth funds have been a beneficial source of capital for U.S. financial institutions," said Federal Reserve Board General Counsel Scott Alvarez. He was one of several officials testifying before a U.S. House of Representatives financial services subcommittee on the topic.

Some of America's biggest banks, including Citigroup Inc and Merrill Lynch & Co, have been forced to seek billions of dollars in fresh capital from foreign investors after they suffered huge losses on subprime mortgages.

The investments have raised concerns that foreign governments might be investing for political rather than financial gain, and some day might use those stakes to advance their own national interest.

"Protectionist sentiment stems partly from a lack of information and understanding of sovereign wealth funds, which in turn is partly due to a lack of transparency and clear communication on the part of the funds themselves," said Treasury Undersecretary for International Affairs David McCormick.

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Sovereign wealth funds currently manage an estimated $1.9 trillion to $2.9 trillion, more than hedge funds and private equity funds, and could grow to $15 trillion in the coming eight years, experts have said.

The funds, many of them in the Middle East but also in Russia and China, have been bolstered by rampant oil prices and large U.S. trade deficits. These have accelerated the accumulation of assets abroad that are being reinvested back into the United States.

Citigroup alone raised about $12.5 billion after announcing a record quarterly loss of nearly $10 billion. Nearly $7 billion came from Singapore Investment Corp Pte and $3 billion from the Kuwait Investment Authority.

McCormick said on top of having the International Monetary Fund develop best practices for wealth funds, the U.S. government wants the Paris-based Organization for Economic Cooperation and Development to study guidelines for countries receiving the money.

"These should have a focus on avoiding protectionism," he said, adding that the OECD expects to issue a statement on the issue of sovereign investment in June.

Alvarez concentrated his testimony on the technical grounds under which the Fed would review a planned purchase.

Noting sovereign wealth funds had pumped $24 billion into U.S. financial firms in recent months, Alvarez said none of these investments had breached the 10 percent controlling threshold that would trigger an automatic Fed review.

"Most sovereign wealth funds, like many other investments ... have structured their investments so as not to trigger the threshold for review and approval... and have designed their investment to be passive," he said.

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