Sovereign Wealth Funds to the Rescue

Sovereign Wealth Funds (SWF'f) saviorsSovereign Wealth Funds were a topic of this blog last year and they are coming to general attention again. A Sovereign Wealth Fund or SWF are (for the most part) the surplus money that developing countries have, sometimes this is due (like in the middle east) to oil revenues, other times (like China) its from industrial output, but in any case it is a fund which is owned and controlled by a countries government, some people are quite sceptical of them claiming that they can interfere with markets on different levels even as far as being the cause of geopolitical risk .

Since last year many of the banks that should have gone out of business are still treading water thanks to these funds, they have been the healing salve to the wounds of the sub prime mortgage fiasco. Citibank and Merrill Lynch were both saved by SWF’s. (China and Abu Dhabi). Maybe this is a signal that capitalism is working but for some countries such as France they are an unwelcome guest, Sarkozy recently promised to protect France from their influence, however, to be fair none of them are looking to get involved with French companies.

SWF’s don’t operate like other monetary funds, they don’t really have to answer to anybody – with the exception of Norway’s Sovereign Wealth Fund, and that’s precisely what causes so much suspicion of them, they can be, and likely are, the ultimate Vulture Investors, they can ply cash into areas when the proverbial hits the fan, typically this is by bailing out companies who are distressed and with a stock price to reflect that, again, Citi and ML both had huge losses and were saved by SWF’s, in fact, Citi’s write off of 18 billion is the same size as the whole of AIB who are considered a big player in the Irish Market, it kind of puts things in a global perspective I suppose. Another issue is that Sovereign Wealth Funds are not regulated and they answer to nobody, if Jerome Kerviel can mess up to the tune of €5 billion before being caught out then imagine the damage a fund with twenty times that amount in liquid cash could do before it was fully realise the impact?

hillary clinton - mortgage blog appearanceIt has even become an issue in American politics, Hillary Clinton said it on the 15th of January ‘We need to have a lot more control over what they [SWF’s] do and how they do it’ reflecting perhaps the ongoing American concern over Arabs owning their ports and the Chinese owning their oil companies. On a separate note Barack Obama looks set to be the next president so in any case it will be his views that will matter the most in the long term. On one hand there is the fact that once a crisis passes that help from outside may no longer be fashionable or wanted and my personal guarantee says that at some stage there will be a backlash against some of the SWF’s. As well as that, the money is coming from the likes of China who don’t have a liberalised currency and that alone is an argument for shafting them out of it at some point in the future. I have no fear of this being actually read in China, not because its in English but because their idiot government also has very tight controls on the Internet and bans any site that doesn’t agree with them.

One thing that would ease concerns would be if there was some more transparency and some understanding behind what the Sovereign Wealth Funds are seeking long term, however they are not obliged to do that and the truth is why would they bother doing that if they don’t have to? What gives me a pained but wry smile is that the USA and Europe have been doing it for years and we never had to answer to these countries so I suspect that any call for greater transparency will be met with a ‘well you didn’t do it when it was your turn so neither will we’.

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