The Wall Street Journal reports in 'U.S. Pushes Sovereign Funds To Open to Outside Scrutiny,' that the US Treasury Department is talking to two large sovereign wealth funds, Singapore's Temasek and the Abu Dhabi Investment Authority, as the first steps in a process to ''draft rules to oversee the behaviour of such funds, without discouraging them from investing.'
Let's see if I get this straight. The US is running a chronic current account deficit, which means we are dependent on the kindness of foreigners to maintain our lifestyle. In other words, we have to run a capital account surplus, which is tantamount to having other countries buy our real or financial assets. And while the fall in the dollar has reduced our current account deficit somewhat, it's still at a high level. Ergo, we need our money fix.
Brad Setser, who monitors the international capital data closely, has been reporting for some time that the private demand overseas for US assets has fallen considerably. The key buyers now are foreign governments. And those governments, who used to be content to buy low-returning Treasury bonds, are now looking to diversify their holdings and earn higher returns. Enter the sovereign wealth funds.
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What is comical about this all of this is the idea that we have any say in this matter. Of course, the US can nix individual deals, as we did to Dubai Port World's purchase of UK P&O Ports. Dubai Ports had to divest five US port operations; the UK imposed no such requirement. Similarly, the US blocked Chinese oil company CNOOC's bid for Unocal blocked, which ruffled quite a few feathers.
But we've already let foreign banks make substantial investments into our troubled financial sector, which one can argue gives them strategic leverage. Yes, these are minority stakes, the investors don't hold any board seats. Nevertheless, as eminence grise Felix Rohatyn pointed out, "You don't need to appoint two directors to a board to have influence when you own 10 percent of the company."
Indeed, when Citi's board was ready oust Chuck Prince, Sandy Weill paid a visit to the bank's biggest shareholder, Prince Alwaleed, to make sure he was on board. Alwaleed owns a mere 3.6%, smaller than some of the stakes recently acquired.
So consider the elements of fantasy at work in this discussion over these efforts to set guidelines on SWF investments:
1. We are pretending that a large stake in and of itself won't lead to influence
2. We are pretending that we have negotiating leverage in this matter. We don't. We need the dough desperately. Unless we get our saving rate up to make ourselves more independent (which will almost certainly lead to a recession or a very prolonged period of low growth), we are in no position to place restrictions on capital inflows (except now and again, for show)
3. We are pretending that any commitments made are meaningful. Let's say the SWF decide that it's politically expedient to play nice and agree to certain measures, like allowing for a certain amount of transparency and publishing their fund objectives, which will of course be to earn a certain level of financial return and will have nothing to do with getting access, say, to resources or technologies.
First, there is no way to make the funds conform to their statements. Second, even if the funds are completely sincere when they make these representations, a change in leadership can lead them to repudiate their former policies, after they have acquired substantial positions.
So these negotiations are really theatre for the benefit of the American public. We'll plead in private, if need be, for the SWF to give us something to keep Congress from interfering, and they may well agree to cosmetic measures. Or, if they really have no interest in going along, they'll just string out the discussions until our financial sector has another ratchet down and the wounded players have nowhere else to turn.
Oh, and another amusing and revealing tidbit from the Journal story:
Abu Dhabi's fund has assets of about $900 billion; Singapore's is estimated to have $300 billion. 'The two funds are some of the most mature, well-known and credible sovereign-wealth funds,' said Treasury Undersecretary David McCormick in an interview yesterday. 'We are actively trying to have many conversations' with different funds.
The claim that these funds are 'mature, well-known, and credible' is mind-bogging (although those terms are so carefully chosen as to be close to meaningless).
Ted Truman, a former senior staff member at the Treasury Department and the Fed, recently developed and published a scorecard for the Peterson Institute that evaluated 32 SWFs (see here, page 12 for the rankings). On a 25 point scale, New Zealand was the best, earning 24 points. Qatar was second to worst, earning a mere two points. It got zero for governance and zero for transparency. This Singapore fund (note this fund is different from another Singapore SWF, Temasek, which got much higher marks) is third from the worst, again scoring zero on transparency. While the story does mention these poor rankings, it does so much later.
Also note that the story several times mentions that at least 11 nations that are recipients of SWF investments have made some restrictions on direct investment. While narrowly true, the '11 nations' is a bit misleading in terms of the US's stakes in attracting foreign capital. It creates the impression that all have common cause when the reality is more complex. We now absorb 75% of the world's savings. Most other countries can afford to say no; it's not a luxury we have.
Posted by Yves Smith on Naked Capitalism, Tuesday 26th February
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