Sovereign Wealth Funds (SWFs) have been around for over four decades, but only recently have made it as headliners in Davos, Switzerland, the winter playground for the world's corporate, government and political leaders who meet annually to carve up the world's resources. SWFs are large pools are capital controlled by sovereign governments that invest in global markets, now worth about $3 trillion; twelve of which have been established since 2005. They are expected to grow about $1 trillion annually and may grow to over $15 trillion within the next ten years, and perhaps double that in 20 years.
SWFs are part of an expanding array of diverse and diffused pool of capital searching for capital appreciation and income, currency diversification and long-term growth. Along with national reserves, hedge funds and public employee pension funds, they provide just the right blend of passive capital to enable management of large corporate oligopolies to dominate global markets, so that this elite wealthy class of corporate managers can continue to manipulate the global economy and advance their personal materialistic self-interest.
There are actually four kinds of sovereign investments: national reserves, public pension funds, state-owned enterprises and SWFs. There are two types of SWFs, based upon the source of foreign exchange assets: commodity SWFs , funded by commodity exports, such as oil, primarily dominated by Middle Eastern countries, and non-commodity SWFs; those that have accumulated large balance-of-payments surpluses, such as China and Singapore.
While SWFs control double the amount of assets of hedge funds ($3t vs. $1.5t), and 25% of the current market capitalization of the S&P 500 (valued at $12t), they are insignificant compared to the $53t in pension and endowment funds and $190t in total global financial assets. On the other hand, $3 trillion isn't exactly chump change.
Below are some of the largest SWF players:
UAE: Abu Dhabi $875b
Sinapore: GIC 330
Saudi Arabia 300
Kuwait 250
China (CIC) 200
Singapore: Tamasik 159
Russia 150
Libya 50
Qatar 50
Algeria 43
Brunei Investment Agency 30
Korea Investment Corp 20
SWFs have not only been getting attention for their growing size, but also because they are controlled by foreign governments, such as Abu Dhabi, Kuwait, Singapore, China and Russia. The first political shockwave was set off when China's state-owned enterprise, CNOCC, attempted to acquire Unocal in 2005, and the United Arab Emirates' OP World sought to acquire seven major U.S. ports in 2006. Both were unsuccessful principally because they are controlled by "evil" sovereign governments that may have a political agenda inconsistent with corporate oligopolies and the politicians they control.
Some of the opposition has ameliorated by SWF's retention of well-connected lobbyists that have been successful in "calming" politicians. For example, Democratic Senator Charles Schumer, a member of the Senate Banking Committee, was successfully lobbied by the 20 largest U.S. financial firms, including a dozen CEOs, calling for "open investment." Schumer now favors SWF bailouts of the U.S. financial sector. The Abu Dhabi Investment Authority, the largest SWF, hired a top lobbying firm, Burson-Marsteller, and paid it $800,000 for an initial eight-month contract to "improve communications" with Congress. Congress and SWFs are now the closest of friends.
Washington, D.C. insiders and SWFs are also part of the same family. According to a Wall Street Journal article, Beltway players such as former New York Fed Chairman William McDonough, a vice chairman of Merrill Lynch, is a member of the board of advisers of Singapore's Tamasek SWF, which has a stake in Merrill Lynch as well as Barclays and Standard Chartered banks in the U.K. Former Senate Banking Committee Chair Phil Gramm, an adviser to Republican Presidential Candidate Senator McCain, is vice chair of UBS, which recently sold a stake in the bank to Singapore's SWF.
More recently, Abu Dhabi's SWF paid $7.5 billion for 4.9% of Citigroup; China's $200 billion SWF (CIC) invested $5 billion for 9.9% of Morgan Stanley; and Singapore's SWF paid $4.4 billion for 9.4% of Merrill Lynch and has an option to invest $600 million more. Reportedly, Citigroup is looking for another $8-10 billion from foreign investors, including Saudi Prince Ahvaleed bin Talal and the China Development Bank.
That's not all and it's only the beginning. Last year, Singapore's SWF invested $9.72 billion in Swiss banking giant UBS and the Chinese SWF invested $3 billion in Blackstone Group, a U.S. hedge fund. Abu Dhabi's Mubadala SWF owns 7.5% of Carlyle, another hedge fund, while Borse Dubai, owned by the Dubai government, recently bought 20% of the NASDAQ Stock Market.
Private equity firms or hedge funds such as the Hopu Fund which is reported to be a $2 billion fund run by two former senior Goldman Sachs bankers will compete with Carlye Group and TPG, two other private hedge funds, to fund Chinese companies operating both in China and abroad. Singapore's Tamesek Holdings initially invested $1 billion in Hopu.
The China Investment Corporation (CIC) also recently invested $3-4 billion in a private hedge fund started by J.C. Flowers & Co. (controlled by another former Goldman Sachs banker that will specialize in buying financial companies). CIC has now invested in Flowers, Morgan Stanley and Blackstone.
State-owned corporations or government financial institutions are also "buying into" the expansion of global capitalism. Industrial & Commercial Bank of China (ICBC) is buying a 20% stake in South Africa's largest bank, Standard Bank Group, for almost $5 billion. ICBC raised $21 billion abroad in 2006 and has total assets of $153 billion. South Africa's Standard Bank operates in 38 countries and has assets of $119 billion.
Politicians, federal government officials, the Bush Administration and many in corporations not on the receiving end of large SWF and government investments, have raised fears that they will have undue or excessive foreign political influence over the U.S. economy, economic sectors or specific U.S. corporations. This is a very interesting issue to be raised, since U.S. corporations have been privatizing U.S. and foreign government services at a rapidly increasing pace, including the military, public water service and supply, energy, public security and fire safety, education, telecommunications and transportation.
In addition, those wonderfully successful and tax payer-subsidized U.S. financial corporations that brought us excessive CEO compensation and multi-billion dollar sub prime mortgage write-offs, have been buying Chinese government-controlled banks like there is no tomorrow. For example, Bank of America has invested $3 billion for a 9% stake in the China Construction Bank, while Citigroup has spent $3 billion buying 20% of China's Guangdong Development Bank and Goldman Sachs invested $2.58 billion for about 7% of the Commercial Bank of China. Perhaps it would have been a better use of bank's shareholder assets to take care of their mortgage business in the U.S. first rather than turn over American capital and "financial expertise" to a totalitarian government.
Another "fear" expressed through the media which has been some of the mainstay of ongoing political rhetoric, is that these SWFs are investing in U.S. financial institutions and companies to gain access to sensitive information or technology. What a hoot! U.S. corporations in many of these countries, especially in the Middle East and China, have done nothing but provide capital, advice and technology directly to totalitarian and authoritarian governments for lots of money. The entire Chinese Golden Shield created by the government, police and military to spy on its citizens and track down democracy advocates, has been built and maintained by U.S. technology companies.
Corporations, state-controlled financial institutions, hedge funds and SWFs all adhere to the morality of materialistic self-interest, which is dependent upon exercising economic and political power. Political power and economic power are exercised as one in the same. Milton Friedman, a staunch conservative supporter of capitalism, based his theory of political freedom upon the separation of economic and political power.
Unfortunately, they are not separate. The economic power of the management of national reserves, global corporations, hedge funds and SWFs manipulate governments and/or politicians to extract economic and political concessions, using whatever political system is available to maximize materialistic self-interest. These entities are either creations of governments or have been authorized by governments, but do not serve any public interest or civil society. They are independent, autonomous and sovereign, whether they are "public" or "private." There is no global public control, authority or oversight.
In addition, the actual ownership of global corporate financial institutions is separate from control. Owners, or shareholders, have given up control for liquidity in global markets. Corporate managers control the nomination of their boards of directors and the directors nominate themselves. It is a closed loop which is self-perpetuating. These wealthy managers are part of a small family of elite and powerful people who will increasingly dictate global economic and political policies. SWFs and other pools of capital, provide diverse and diffused sources of passive capital, easily accessed and controlled by this elite group.
We don't have to worry about radical Arab or Chinese "communist" governments or nation states using their financial resources to extract political concessions from the capitalist West. The club from Davos have the global economy and our political systems well under control. Nation states, including the United States, have already sacrificed sovereignty to the "magic of the markets." The club's goals have nothing to do with political ideology, but have everything to do with their secular faith in the morality of materialistic self-interest.