Beware the colour of money – UPDATED

Some of you must be aware of how sovereign wealth funds are putting huge amounts of money to rescue large US banks hit by the sub-prime crisis. See e.g. World Rides to Wall Street’s Rescue which mentions how investors from as far afield as Japan, Korea, Singapore, Saudi Arabia and Kuwait have come to the rescue of leading US Banks including Citigroup Inc. and Merrill Lynch…(around $19.1 billion has gone into these two banks alone).

Many of these funds are also investing a huge amounts of their wealth in India. This is something which I have been watching with some concern for a while.  A few weeks back, I came across this piece which confirmed the fears that I had: Why India Should Welcome — But Watch — Sovereign Wealth Funds.

In the article,�Vinay B. Nair at the Wharton Financial Institutions Center made some good points.

Excerpts:

…Sovereign Wealth Funds (SWFs)…are rapidly moving to the forefront of international finance. Broadly defined, these are investment entities that manage and invest the national savings of different countries. Several estimates…suggest that, today, such funds house $2.5 trillion.

…While investors have reasons to welcome the liquidity that such funds bring, many governments have reasons to be vigilant.

Could these investments be used for strategic purposes by international governments? Won’t the objectives that drive a government’s investment go beyond simple financial objectives? Such questions have worried many politicians in Europe and the U.S. — especially after Dubai’s bid for the ports operator Peninsula and Orient, and China’s takeover bid for Unocal, a Californian oil company.

…

Some experts propose enacting laws that restrict the activities of SWFs. Surprisingly, even many traditional free-market advocates have not dismissed these concerns as easily as they normally do. For example, in an article published in the Financial Times on July 28, former Harvard president Lawrence Summers asked: “What about the day when a country joins some ‘coalition of the willing’ and asks the U.S. president to support a tax break for a company in which it has invested? Or when a decision has to be made about whether to bail out a company, much of whose debt is held by an ally’s central bank?”

…

To sum up, stopping foreign inflows into Indian markets is undesirable, but getting to know the identity of foreign capital through better disclosure is a good idea.

I think not only the identity but also the guiding principles of a SWF are important to understand. Some of them may well have aims that conflict with our strategic interests and development goals.

By the way, I am in good company here. No less a person than Hillary Clinton is worried about the impact of these funds. Excerpt from a recent interview:

…This evening on NBC Nightly News, our lead story was about the fact that Citigroup and Merrill Lynch have both gone overseas, as some put it, hat in hand, looking for $20 billion in investment to stay afloat from, among other things, the government of Singapore, Korea, Japan, and the Saudi Prince Alwaleed, the man — Rudolph Giuliani turned his money back after 9/11.

This is — strikes a lot of Americans as just plain wrong.

WILLIAMS: At the end of our report we said this may end up in Congress. What can be done? And does it strike you as fundamentally wrong, that much foreign ownership of these American flagship brands?

CLINTON: Brian, I’m very concerned about this. You know, about a month and a half or so ago I raised this concern, because these are called sovereign wealth funds. They are huge pools of money, largely because of oil and economic growth in Asia. And these funds are controlled often by governmental entities or individuals who are closely connected to the governments in these countries.

I think we’ve got to know more about them. They need to be more transparent. We need to have a lot more control over what they do and how they do it. I�d like to see the World Bank and the International Monetary Fund begin to impose these rules, and I want the United States Congress and the Federal Reserve Board to ask these tough questions.

Lesson: Beware the colour of money*.

* with apologies to Walter S Tevis

UPDATE:

From a Financial Times report: “Saudis plan huge sovereign wealth fund” (Henny Sender and David Wighton in New York and Sundeep Tucker in Hong Kong, December 21 2007)”

“Saudi Arabia plans to establish a sovereign wealth fund that is expected to dwarf Abu Dhabi’s $900bn and become the largest in the world”

Image courtesy: Wikipedia