Invasion of the bank snatchers? SWFs should be welcomed.
There is unease in political and media circles about the prospect of sovereign wealth funds taking over large chunks of Western industry, and especially banks. Such fears are vague and ill-informed: SWFs are a very useful source of capital and the law is well equipped to prevent any damaging effects.
With Hollywood’s screenwriters on strike, actor Kiefer Sutherland, with plenty of time on his hands in jail for drink driving, could do worse than look for inspiration for the next series of the hit drama 24 to media coverage of the impact of sovereign wealth funds.
Sutherland’s character Jack Bauer could renew his enmity with the Chinese — only this time he would not recover a printed circuit board, but save the biggest bank in America.
When even Fox News is running stories on ‘SWFs’, they have become part of the fabric of popular culture.
The news yesterday (Monday) that UBS had turned to the Government of Singapore Investment Corp and an unnamed Middle Eastern investor for a Sfr13bn capital injection through mandatory convertible bonds was just the latest in a string of such investments.
Last month the Abu Dhabi Investment Authority pumped $7.5bn into Citigroup. According to Morgan Stanley, sovereign wealth funds invested $37bn in Western financial institutions in the year to November.
Surely this creeping takeover by foreign governments with varying degrees of respect for human and civil rights is ripe for shock horror treatment in an action movie or airport blockbuster novel?
Yet those involved in the upper echelons of the capital markets probably wonder what all the fuss is about.
After all, Western governments themselves — either directly as sovereign issuers, or indirectly through supranational institutions or national agencies — have long been going cap in hand to the central banks of Asia, the Middle East and increasingly Russia, seeking to borrow a share of their burgeoning foreign exchange reserves.
True, holding a stake in a company or bank gives control to the owner in a way that investing in a bond does not.
But before the US subprime mortgage crisis and the influx of SWF capital into troubled banks, all the worried talk was of the impact foreign central banks were having on the US Treasury market.
It was the effects, and not the existence of the latter that were being questioned, since the huge holdings of Treasuries in foreign exchange reserves around the globe are taken as given.
The conventional wisdom is that the government bond markets are held in an uneasy equilibrium, reminiscent of the nuclear deterrence theory of Mutually Assured Destruction.
If emerging market central banks dumped their holdings of US Treasuries, disaster would ensue for both parties.
In fact, a plan to undermine the US economy by shorting Treasuries was a key part of a Japanese financial and military attack on the US in Tom Clancy’s novel Debt of Honour. But while Clancy was apparently asked to remove details of how to build a nuclear bomb from one of his other Jack Ryan novels, nobody had any worries about this possibility getting out into the open.
Why are commentators and politicians now so concerned about foreign governments buying Western financial institutions and companies?
Perhaps the German politicians who have dubbed sovereign wealth funds “giant locusts” should consider the fact that the German Finanzagentur’s decision to issue its first foreign currency bond in 2005, a $5bn benchmark, was driven by the desire to please Asian central banks.
SWFs might not be as transparent as their suitors would like, but, unlike hedge funds and private equity funds — previously dubbed “locusts” by a German politician — sovereign funds have the potential to take a long term view and counter some of the imbalances in the world financial system.
There is no doubt that the trillions of dollars building up in coffers from Beijing to Bahrain and Brasilia are a sign of a long term transfer of wealth, influence and power from Europe and North America to the developing world.
But that is a secular trend which the former great powers must learn to live with.
Decisions in Western capitals about how much investment scope sovereign wealth funds are permitted should be based on practical and specific considerations, rather than an emotional response to this inevitable transformation of the world’s balance.
Like any other investor, SWFs have to operate within the law of the host country, including specific regulatory regimes for banks and privatised industries such as telecoms, transport and utilities.
Any non-commercial or damaging decisions such companies were moved to take in the future could be easily blocked at that time — in any case, they would be likely to do no more than cost the foreign government money.
Europe and the US could do worse than follow the advice of Kitty Ussher, economic secretary to the UK Treasury, who last week highlighted the benefits of such investors and championed the City of London as a financial base for sovereign wealth funds.
Politicians should stop playing to the media and concentrate on economic policies based on reality, not fiction.
As for Kiefer Sutherland, he should choose a different threat to the world order for Jack Bauer to fight. Global warming, for instance.