Congressional concern has prompted a federal investigation into the increasing investment presence in the U.S. of foreign countries' state-run sovereign wealth funds and their effect on corporate governance, transparency and adequate regulation of corporations.
The Government Accountability Office formally began working on a study examining sovereign wealth funds, the investment arm of foreign governments, and the size and type of investments these pools of capital are making in the U.S. The study was requested in September by Alabama's Richard Shelby, the ranking Republican on the Senate Banking Committee. Sen. Christopher Dodd, D-Conn., the committee's chairman, supported the request and said he is eager to see the results.
In addition to Dodd, other lawmakers and Securities and Exchange Commission Chairman Christopher Cox have expressed concern about the investment funds, which have recently become major players in the U.S. by buying large minority stakes in U.S. investment banks and other businesses, most of which are struggling with mortgage-related write-downs. One major concern voiced by Dodd is that these funds break down the "arm's length" relationship between government, as the regulator, and business, as the regulated. Dodd held a hearing on sovereign funds in November and plans to continue following the issue this year. "I support foreign investments in the United States that help strengthen our economy and create American jobs, so long as they do not compromise our national security or pose a threat to our economic stability," Dodd said in a statement. "These issues [sovereign wealth funds] have been and will continue to be a high priority for the committee."
The Chinese state-run China Investment Corp., or CIC, which was formed last year, already has bought large minority stakes in Blackstone Group LP, Morgan Stanley and Barclays plc, which operates in the U.S. Abu Dhabi Investment Authority reported a $7.5 billion investment in Citigroup Inc. in November, and Bear, Stearns & Co. in October swapped $1 billion stakes with Citic Securities Co. Ltd., a state-owned Chinese brokerage firm.
The size of government-run funds is reaching once-unimaginable proportions because of China's foreign currency surplus built through the endemic U.S. trade deficit with the country. Meanwhile, Arab oil producers are setting profit records.
A key question for Washington policy makers is whether the interagency Committee on Foreign Investment in the U.S. should be investigating transactions where sovereign wealth funds, such as CIC, are buying large minority stakes in the U.S. businesses. Traditionally, CFIUS has investigated foreign acquisitions of U.S. assets, but not minority stakes. With recent deals between financial services companies and the formation of trans-Pacific partnerships, lawmakers and regulators alike are asking questions.
The Senate Banking Committee has jurisdiction over CFIUS and was one of the key government panels involved in drafting new legislation for the interagency board after lawmakers expressed outrage over Dubai-based DP World's attempt to buy port operations in the U.S. House Financial Services Committee Chairman Barney Frank, D-Mass. ,has also said he or Domestic and International Monetary Policy, Trade and Technology Subcommittee Chairman Luis Gutierrez, D-Ill., plans to hold hearings on the funds. "We are going to look at the big picture of this phenomenon and try to gauge what are the public policy implications for these funds in the U.S.," said Frank spokesman Steven Adamske.
CIC, like most sovereign wealth funds, is modeled after Singapore's Temasek Holdings Pte. Ltd., which has expanded by leaps and bounds, partly through acquisitions of stakes and whole companies. Temasek, which has reportedly produced an average return of 18 percent a year since its founding in 1974, started with $354 million in assets and has amassed $129 billion. In December, Temasek took a $4.4 billion stake in Merrill Lynch & Co.