America’s financial regulator yesterday gave warning that Middle Eastern and Chinese government-controlled sovereign wealth funds “raise a number of securities law enforcement issues”.
Sovereign wealth funds, such as Singapore’s Temasek and the Kuwait Investment Authority, have collectively in recent months injected about $30billion (£15.4billion) into Wall Street firms, in return for large minority stakes in Merrill Lynch, Citigroup, Bear Stearns and Morgan Stanley.
Investors and politicians have largely welcomed these capital infusions, which the Wall Street firms badly needed after suffering multibillion-dollar losses on sub-prime mortgage bonds, at a time when few other investment groups had the vast quantities of cash that the banks needed.
However, there is also rising concern that these opaque, government-controlled investment funds could potentially be abused for political gain.
Linda Thomsen, the US Securities and Exchange Commission’s director of enforcement, yesterday told a US congressional hearing: “We are concerned that if the government from which we seek assistance is also controlling the entity under investigation, the nature and extent of the co-operation could be compromised.”
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She told the hearing, on national security implications of sovereign funds: “These funds raise a number of securities law enforcement issues.”
Robert Dohner, the US Treasury Deputy Assistant Secretary for Asia, also expressed concern about the funds at the hearing yesterday. He said: “Transactions involving investment by sovereign wealth funds, as with other types of foreign investment, may raise legitimate national security concerns.”
Mr Dohner added: “There is a risk that the rise of sovereign wealth funds could provoke a new wave of investment protectionism, which would be very harmful to the global economy.”
He said: “Protectionist sentiment could be partially based on a lack of information and understanding of sovereign wealth funds, in part due to a general lack of transparency and clear communication on the part of the funds themselves.”
Separately, the White House tried to ease fears over sovereign funds by emphasising their financial importance. A government spokesman said: “On balance, if they are transparent and they are free from political decision-making, they can contribute to overall growth in the global economy by investing in places that need capital. They can contribute to growth here in the US economy and other economies.”
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The congressional hearing reflects growing concern about the rise of the sovereign funds, which presently hold $2,500 billion in assets. These government funds are increasingly investing overseas to improve their returns and their assets are expected to grow to about $12,000billion over the next eight years as a result of the expected rise in their profitability and the rapid growth of their countries’ economies. Some of the biggest funds are based in China, Kuwait, Singapore, Abu Dhabi, Saudi Arabi and Qatar.