Over the years, we have grown accustomed to government bailouts of financial companies. The odd thing about the current credit crunch, however, is that it isn't the US government that is doing the bailing.
Rather, government-owned sovereign wealth funds keep popping up in the news.
The flurry of activity has aroused concerns in Washington policy circles, where the hottest question has become: "Are foreign government purchases of US assets a good or a bad thing?"
The answer to that, of course, is unclear, which suggests that congressional meddling is on the way.
Last week's reported US$5 billion cash infusion into Merrill Lynch & Co by Singapore's state-owned Temasek Holdings Pte may be the latest in a series of high-profile transactions. Last month, the Abu Dhabi Investment Authority bought a US$7.5 billion stake in Citigroup Inc, significantly easing liquidity concerns at the bank. China Investment Corp. has since made a US$5 billion investment in Morgan Stanley.
Given the breadth of financial stress, it is likely that even more sovereign wealth fund money is going to flow into key US firms in coming months.
The potential cash flow is enormous. Today, the funds manage an estimated US$2 trillion to US$3 trillion. To offer some perspective, that's significantly more than all the world's hedge funds combined.
Some financial analysts estimate the total quantity of assets managed might grow to US$12 trillion in the next eight years.
It is startling when one pauses and considers the scale of these enterprises. The world's largest sovereign wealth fund is the Abu Dhabi Investment Authority, which manages US$625 billion, mostly coming from windfall oil profits in the United Arab Emirates.
The funds in Norway, Singapore, Kuwait and China each manage US$200 billion or more. The US even has one, the US$40 billion Alaska Permanent Reserve Fund, which has invested the proceeds from mining in the state since 1976.
The world's oldest such fund is the Kuwait Investment Authority, which was founded in 1953 to take advantage of excess oil revenue.
Sovereign wealth funds have long been used to generate an endowment to invest the proceeds from diminishing natural resources, and not just oil.
The Kiribati Revenue Equalization Reserve Fund, established in 1956 to invest the profits from a tax on bird-manure fertilizer exports, manages an investment portfolio that is about nine times the size of the economy of the diminutive Pacific island.
Purchases by these funds are different from those by normal shareholders for a simple reason. Governments might not always care about maximizing profit. They have strategic interests as well.
China might invest in a US semiconductor manufacturer, and then use its influence on the board to reduce activities that compete directly with Chinese producers.
Such manipulation isn't unprecedented, although the primary culprits to date have been US state governments. In California, Safeway Inc found itself fighting against both its own unions and Democrats in the state government when the California Public Employees' Retirement System attempted to influence the election of more union-friendly board members.
Republican Minnesota Governor Tim Pawlenty tried to get Pfizer Inc to moderate increases in prescription-drug prices after investing US$463.5 million of the Minnesota State Board of Investment's funds in the drugmaker's stock.
When foreign governments are involved, the downside scenarios can be chilling. An enemy of the US could, if it had sufficient control of US financial institutions, use that power to gain intelligence about the activities of private citizens. It might even use its influence to attack the US economy during a time of conflict.
Imagine that China bought Citigroup, then shut it down during a conflict with Taiwan if the US tried to interfere.
Fortunately, the activities of foreign governments to date are anything but ominous. Indeed, many analysts liken sovereign wealth funds to the endowment funds held by private US universities. But keeping that image is crucial if the funds are to stay in the game.
Accordingly, US Congress needs to think more carefully about legislation that can ensure the funds and other government investments are tame.
Fortunately, a simple solution presents itself. If the risk of foreign-government involvement is that the government might pursue a strategy that's not in the interest of maximizing profit for shareholders, then one need only limit the influence of the government shareholders.
There's an easy way to do that: simply pass a law that prohibits governments from exercising the voting rights of shares they purchase.
Under such a rule, governments would rely on private shareholders to make the key governance decisions of the assets they own, just as I do when I don't vote the shares that I own through mutual funds.
Since private shareholders care about maximizing the value of their investments, sovereign wealth fund investors would have their interests fully aligned with those of their partners, so long as those interests are solely focused on long-run returns.
Given that government meddling could be pernicious, it seems essential that such legislation be on the agenda next year.
Kevin Hassett is director of economic-policy studies at the American Enterprise Institute and an adviser to Republican Senator John McCain of Arizona.
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