The Economist, Jan 17th 2008
The biggest worry about rich Arab and Asian states buying up Wall Street is the potential backlash
BEN BERNANKE once spoke of dropping money from helicopters, if necessary, to save an economy in distress. The chairman of the Federal Reserve probably did not envisage that choppers bearing the insignia of oil-rich Gulf states and cash-rich Asian countries would hover over Wall Street. Yet just such a squadron has flown to the rescue of capitalism’s finest.
On January 15th the governments of Singapore, Kuwait and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in America’s credit crisis. It was not the first time either had tapped the surplus savings of developing countries, known as sovereign-wealth funds, that have proliferated in recent years thanks to bumper oil prices and surging Asian exports. Since the subprime-mortgage fiasco unfolded last year, such funds have gambled almost $69 billion on recapitalising the rich world’s biggest investment banks (far more than usually goes the other way in an emerging-markets crisis). With as much as $2.9 trillion to invest (see article), the funds’ horizons go beyond finance to telecoms and technology companies, casino operators, even aerospace. But it is in banking where they have arrived most spectacularly. They have deftly played the role of saviour just when Western banks have been exposed as the Achilles heel of the global financial system.
Moneymen or mischief-makers
At first sight this is proof that capitalism works. Money is flowing from countries with excess savings to those that need it. Rather than blowing their reserves on gargantuan schemes, Arab and Asian governments are investing it, relatively professionally. But there are still two sets of concerns. The first has to do with the shortcomings of sovereign-wealth funds. The second, bigger, problem is the backlash they will surely provoke from protectionists and nationalists. Already, Nicolas Sarkozy, the French president, has promised to protect innocent French managers from the “extremely aggressive” sovereign funds (even though none has shown much interest in his country).
Although sovereign-wealth funds hold a bare 2% of the assets traded throughout the world, they are growing fast, and are at least as big as the global hedge-fund industry. But, unlike hedge funds, sovereign-wealth funds are not necessarily driven by the pressures of profit and loss. With a few exceptions (like Norway’s), most do not even bother to reveal what their goals are—let alone their investments.
For the bosses at the companies they invest in, that may be a godsend: how nice to be bailed out by a discreet “long-termist” investor who lets you keep your job, rather than be forked out in the Augean clean-up hedge-fund types might demand. A quick glance back at “long-termist” nationalised industries shows what a mess that leads too. And it is not just a matter of efficiency. The motives of the sovereign moneymen could be sinister: stifling competition; protecting national champions; engaging, even, in geopolitical troublemaking. Despite their disruptive market power, their managers have little accountability to regulators, shareholders or voters. Such conditions are almost bound to produce rogue traders.
So far there is no evidence of such “mischievous” behaviour, as the German government calls it (curiously, from another country yet to attract the sovereign-wealth crowd). And weighing the risk of such eventualities against the rewards of hard cash, on the table, right now, makes it clearly daft to raise too much of a stink. America is either in recession or near one; Mr Bernanke has all but promised more aggressive rate cuts, but confidence in the banking system is low. There is a wise old proverb about beggars and choosers.
The relatively friendly welcome sovereign funds have found in America may be temporary. Before the credit crunch American politicians objected to Arabs owning ports and Chinese owning oil firms. On January 15th Hillary Clinton said: “We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it.” Once an emergency has passed, foreign money can often be less welcome. One of Singapore’s funds, Temasek, has learned that lesson to its cost in Indonesia.
In politics, appeals to fear usually sell better than those to reason. But the hypocrisy of erecting barriers to foreign investment while demanding open access to developing markets is self-evident. Host countries should not set up special regimes for sovereign wealth. Although every country has concerns about national security and financial stability, most already have safeguards for bank ownership and defence.
Until East and West even out the surpluses and deficits in their economies, sovereign-wealth funds will not go away. Ideally, the high-savings countries of the Middle East and Asia would liberalise their economies, allowing their own citizens to invest for themselves, rather than paying bureaucrats to do it for them. But do not expect miracles. In the meantime, what should be done to keep the rod of protectionism off their—and the world’s—backs?
Shed light or take heat
For a start, more transparency would go a long way towards easing concerns: an annual report that discloses the fund’s motives and main holdings would be a start. Investments through third parties, such as hedge funds, help too, providing an additional layer of protection against the misdeeds of rogues. Ideally, the funds would eventually take fewer stakes in individual companies, which expose them to the inevitable risks of stockpicking and political pressure. Investing across indices provides more diversification anyway.
At a time when Western governments have at last learned to let the private sector run banks (however lousily it is sometimes done), it is far from ideal that state-owned funds from emerging economies should be buying stakes in them, even minority ones. On the other hand, such cross-border bargain-hunting gives developing countries a bigger direct stake in capitalism’s future. The chief danger will not lie with them. The problem is likely to be in the rich world—and a rising nervousness about foreign money.