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On 15 January 2008, the governments of Singapore, Kuwait and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two US banks that have lost a fortune to the credit crisis sweeping the US economy. These funds from these nations are called “sovereign-wealth funds,” which have proliferated over the last few years thanks to oil revenue and surging Asian exports. What are the motives of these sovereign-wealth funds? The Economist writes: “Norway sees its stash as a pension fund. Russia and Iran have stabilization funds, to counter the volatility of energy prices. China and South Korea want returns—and possibly access to markets, ideas and technology. Whatever their motives, sovereign-wealth funds are sure to influence prices and markets.” Presently, sovereign-wealth funds make up only 2% of the world’s $165 trillion-worth of traded securities—more equity than private equity and more funds than hedge funds.
How should we think about these sovereign-wealth funds that have bailed out US banks? Listen to George Will: “Many countries exporting oil, toys or underwear to America are running trade surpluses. These countries need to do something with their dollars—it is better that they invest them than buy weapons with them—and want something with a higher return than US Treasury bonds offer. By buying minority interests in US financial institutions or other companies, sovereign wealth funds are gaining money-management expertise.” But there are dangers. Sovereign-wealth funds can complicate concerns about fraud and unfair practices if the governments operating them are both market players and referees. Few of them are regulated. Further, could these governments also use their intelligence services’ covert information-collecting to give their investors information advantages? Sovereign-wealth funds are a mixed bag!
In this new order of globalization, the US economy is becoming more dependent on other nations. Nothing exemplifies this more that the sovereign-wealth funds. These funds will be a part of this new order for quite some time—and they demonstrate that the US is more dependent on the global economy than ever!
See Will’s editorial in the Washington Post (3 February 2008) and The Economist (19 January 2008), pp. 11 and 78-80.
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