Help for troubled American financial companies came earlier this year from an unlikely source - the same sovereign wealth funds (SWFs) that many have decried as a threat to U.S. economic independence. Recently, however, the funding has dried up.
The credit crisis that prompted lawmakers and the Bush administration to take up an unprecedented $700 billion rescue package last week could have been much worse if not for the huge injections of capital into U.S. financial companies from the foreign-owned wealth funds at the end of last year and earlier this year, according to financiers and economists.
“Thus far, the role of SWFs in the context of the past year’s turmoil in advanced-economy financial markets has been notably positive,” said John Lipsky, first deputy managing director of the International Monetary Fund, in a recent speech.
But the funds’ huge cash infusions into fast-sinking companies like Citigroup and Morgan Stanley early in the financial crisis proved to be bad investments for most. By summer, big losses on U.S. financial investments by the funds had caused the spigot of cash from overseas to dry up.
Analysts say the pullback in funding from the sovereign goliaths as well as other potential overseas investors is one reason banks are so hard up for cash and in so much trouble today.
“Show us a sovereign wealth fund that’s made money,” said Rob Cox, analyst with Breakingviews.com. “With one or two exceptions - such as Singapore’s injections of money into Merrill Lynch - the investments made by these quasi-government funds over the past year are substantially underwater.”
Brad Setser, a fellow for geoeconomics at the Council on Foreign Relations in New York, said the funds have been hoarding cash in recent months and are reluctant to plow more money into investments that have gone sour.
“The easy deals are no longer available” for U.S. banks, said Mr. Setser, a former staff economist at the Treasury Department. The funds are likely to demand more control over institutions before they invest more and have been stung by criticism at home for making poor investment decisions, he said.
It is also not clear, Mr. Setser said, what happens if a company in which SWFs have a major stake goes under. “Who bails it out? The U.S. taxpayer?”
While the sovereign funds look more like helpful dupes than menacing Trojan horses in the world of finance today, perceptions of the investment funds, which are held and managed by governments around the world, have not always been so positive.
Concern crescendoed earlier this year when the boom in oil and other commodities produced rapid growth in the amount of money controlled by the funds, which has mushroomed from $500 billion in 1990 to an estimated $5 trillion today and is projected to exceed $11 trillion by 2013.
“Not only is the volume of SWFs about nine times larger than that of private equity funds, they are also growing more rapidly due largely to fast-increasing trade surpluses and foreign exchange reserves,” said the U.N. World Investment Report for 2008.
The report said that there are about 70 such funds in 44 countries. The vast majority of holdings are in China, Norway, Russia, Saudi Arabia, the United Arab Emirates (UAE), Kuwait, and Singapore - not coincidentally mostly major oil producers.
The Abu Dhabi Investment Authority of the UAE has between $500 billion and $875 billion under management, the U.N. said. Norway’s pension Fund Global is worth $373 billion - a third of it invested in U.S. entities - and China’s state administration of foreign exchange runs nearly $312 billion, much of it in U.S. Treasury bills and bonds.