Sovereign Wealth Funds: The Rise Of Corporatism

"The first stage of fascism should more appropriately be called Corporatism because it is a merger of State and corporate power"
--Benito Mussolini

Last week Treasury Secretary Paulson had a meeting with representatives from Abu Dhabi and Singapore. The meeting involved setting up "rules" for future investments in America from their Sovereign Wealth Funds.

"SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government," the agreement stated.

No one noted the obvious irony.

A sovereign wealth fund (SWF) is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments.

The first ironic twist of this agreement is the fact that America has spent more than half a century pushing third world nations to open their markets to unrestricted foreign investment. Refusal to comply with America's wishes all too often meant a CIA-sponsored coup.
Now we are trying to put restrictions on how former third-world nation can invest in America.

The second, and more important, ironic twist is the obvious weakness this displays. If America had a strong economy would we really care what the motivations of the SWF's were? If we weren't desperate for the money, would there even be opportunities for the SWF's to buy significant amounts of American assets?
And lastly, do these "rules" have any real world meaning? Not likely.

First, there is no way to make the funds conform to their statements. Second, even if the funds are completely sincere when they make these representations, a change in leadership can lead them to repudiate their former policies, after they have acquired substantial positions.

The fact is that these two funds rank among the worst in governance and transparency. In other words, the entire event was theater for the American public designed to ease the public's fears.

“A year ago this would have been unthinkable. The perception then was that we’re the U.S. and we’re infallible. But then everyone realized the emperor wasn’t wearing any clothes.”
- Axel Merk, manager of the Merk Hard Currency Fund

And speaking of addressing the public's fears about SWFs, there has been a lot of ink spilled on the subject recently.
If there is any pattern you can be certain of with this Administration is to never believe anything until it has been officially denied. (paraphrasing Otto von Bismarck)

So I guess size DOES matter

Sovereign wealth funds are nothing new. Kuwait set up the first SWF in 1953 to invest their surplus oil revenues. Almost two dozen SWFs have since followed (most of them OPEC funds set up during the 1970's), including the APFC (Alaska Permanent Fund). So even our nation's leaders have a SWF tradition.
The problem is their growth in recent years.

In 1990 the world's SWFs probably held, at most, $500 Billion. Then George Bush became president and America started running huge current account deficits. Today SWFs hold around $3.3 Trillion in cash and assets.
Immense trade deficits combined with an active policy of discouraging domestic savings meant huge dollar reserves were built up in east Asian and OPEC central banks.
The traditional way of foreign central banks to invest their dollar reserves were in low-yielding, but safe treasury bonds. However, when Federal Reserve Chief Alan Greenspan pushed the Federal Funds rate below the level of inflation in 2001 and then kept it there, foreign central banks realized they needed a new plan.
Combine the negative real interest rates on treasuries with the dollar falling against almost every currency in the world and you have a situation where foreign central banks were losing tens of billions of dollars in real wealth every year by holding those treasury bonds.

For a good, interactive map of SWFs go to this link.

Russia set up a SWF on January 1, 2004. South Korea founded their SWF in 2005. Libya's SWF was established on August 28, 2006. The biggest potential player of all, China, entered the arena on September 28, 2007. China's SWF has access to enough assets to buy every publicly-traded company in America.
Increasingly foreign central banks are shifting their assets into SWFs.

Sovereign wealth fund assets may soon surpass total official foreign reserves held by central banks and become the main vehicle for capital investment, a Morgan Stanley economist said on Tuesday.
The investment funds — large pools of capital controlled by a government and invested in private markets abroad — altogether control more than $2.8 trillion, but could reach $12 trillion in total assets by 2015, Morgan Stanley managing director Stephen Jen said in a conference call.

An Open Door

You probably remember when the Dubai Ports Authority (DPW) tried to purchase the management contracts to half a dozen major U.S. seaports. The political uproar that followed quashed the deal.
But that was before the credit crunch of 2007. Suddenly large American firms were approaching SWFs hat-in-hand.

When the credit markets froze up in August of 2007 banks lost access to their primary sources of liquidity. Unlike the period of time when Dubai's SWF was trying to buy into our ports, our financial markets were now desperate for capital.
However, the first major foray's into America's capital markets haven't gone well for the SWF's. Some examples:

1) China poured $3 Billion into Blackstone in May of 2007. Blackstone's shared then dropped by 59%.

2) UAE's Abu Dhabi Investment Authority purchased $7.5 Billion in Citigroup securities last November. Citigroup stocks are down 38% since the purchase.

3) Singapore's Temasek Holdings purchased $4.4 Billion of Merrill Lynch stock in December. Those stocks are down 18.4% since then.

4) Singapore's Government of Singapore Investment Corp. bought $9.75 Billion of UBS shares in December. Their stake is now worth 23% less.

5) China returned to purchase $5 Billion of Morgan Stanley in December. Those shares are down 14%.

However, share price isn't the whole story. For instance, in the UAE's purchase of Citigroup:

Abu Dhabi will buy securities that convert to stock and yield 11 percent a year, almost double the interest Citigroup offers bond investors, underscoring the New York-based company's need for cash.

Securities that yield 11% a year are normally called "junk bonds".
Doesn't it seem strange that a foreign SWF is able to buy bonds in America's largest bank getting much better yields than any domestic investor could get? And if that isn't enough to make a person wonder, here's another dozy:
Why are foreign SWFs getting a tax break that gives them an unfair advantage over domestic funds?

I can only speculate the answers to those two questions.

So what's the big deal?

There are two major concerns about SWFs, and neither of them have to do with issues of transparency and accountability (the issues that the MSM and Wall Street are focused on). One concern is talked about in Washington (and dismissed on Wall Street). The other concern isn't mentioned at all.

1) Large SWFs buying up American assets gives foreign governments power and influence, both economic and political, in America.
Sure, they can talk about "rules" and how the "decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals". But let's be serious here - asking a government-controlled agency to not consider politics in its decisions is like asking a fish not to swim, or a dog not to bark.
It isn't going to happen.
Just look at the UAE's currency policy of pegging to the U.S. dollar, which has forced a 12% inflation rate onto their economy. If politics didn't enter into that decision they would have unpegged from the dollar years ago. But the American government likes that political decision, so we don't have "rules" for it.
Do you really think that they will think with politics on their currency decisions, but not on their investment decisions?

So if you dismiss all the blather from the MSM about how we have nothing to fear about semi-hostile governments buying up American assets, you can get down to the reality of "yes, we do have something to fear." The Federal Reserve's and President Bush's policies of encouraging consumption and discouraging savings is acting as a sovereignty transfer mechanism.
Yet somehow sovereignty is no longer part of national security concerns.

However, that isn't what concerns me the most.

2) When you boil it all down, what exactly are SWFs?
They are governments, using public assets to buy pieces of corporations. Thus governments and corporations are becoming partners in enterprise.
That is corporatism, the first step to fascism (some might call it "state capitalism"). The difference is that we are talking about fascism on a global scale.

Don't let yourself get distracted with sleight-of-hand arguments and rhetoric. When you buy stocks in a company, your personal interests and the companies interests become entwine. Why should governments buying stocks in companies be any different?

The reason you don't hear about this fascist development being discussed in this way is obvious - the media, the corporations, and the government all stand to benefit from it. The only ones that won't benefit from it are the billions of non-wealthy people in the world.

Now if you'll allow me a truly paranoid speculation for a moment: don't you think it a little too coincidental that most of the world has begun a crackdown in civil rights and a permanent state of war, while at the same time governments and multi-national corporations are merging into one unit?
Reichstag fire, anyone?

Meta: 

Comments

new world order

When I first heard those railing out those conspiracy theories I thought "what a bunch of kooks" but the more I read the watch the more I think, well, maybe not.

Midtowng, this is an exceptional post! I'm rereading it, finding new info on each reread. I did smell a rat on the Dubai Citigroup investment but now you're pointing out unusual profits in comparison to domestic investors.

I hope this post gets a lot of readers!

I was oblivious to SWF until this read and it also does appear generally Paulson is doing the bait n switch, opposite of apppearances so far.

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Thanks for this

Great post! Do you know why the stock market rallied today considering just how much in debt the US is?

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Sovereign Wealth Funds: The

Paulson proposals are not "Regulation" in a reform sense, as in reform to improve, but dismissal and consolidation of statutory agencies to render them superfluous and ineffective in regulation. Combining the OCC, SEC and trade/commodity future market regulators and meshing commercial banks, brokerages, hedge funds and private banking, and others sounds like a good deal because of streamlining and efficiency, but it jumbles together well regulated and transparent organizations and processes with those those that are now "old boy's club" and completely unreported and untraceable for all intents and purposes. That is an untenable combination.

The 3 commissars(his proposals) that have the Uber powers and rule by decree for the most part is not a good tradeoff when the source of the problems is allowed to fester and boil and gets dealt with after the fact of the disaster, not in its roots and development. This is an issue that requires a far more detailed response and exposure than a 4 paragraph post but will get dealt with in the coming weeks and months.

Remember H Paulson is defending the practices and grasp and future reach of predatory finance capitalism. It includes his own financial "tribe" and holdings, since he is not an guru that happens to be a benign neutral balanced player who wears the title of Treasury Secretary at the moment. He is one of sources of the economic problems we have at present

You must have Javascript enabled to use this form.

Sovereign Wealth Funds: The

Paulson proposals are not "Regulation" in a reform sense, as in reform to improve, but dismissal and consolidation of statutory agencies to render them superfluous and ineffective in regulation. Combining the OCC, SEC and trade/commodity future market regulators and meshing commercial banks, brokerages, hedge funds and private banking, and others sounds like a good deal because of streamlining and efficiency, but it jumbles together well regulated and transparent organizations and processes with those those that are now "old boy's club" and completely unreported and untraceable for all intents and purposes. That is an untenable combination.

The 3 commissars(his proposals) that have the Uber powers and rule by decree for the most part is not a good tradeoff when the source of the problems is allowed to fester and boil and gets dealt with after the fact of the disaster, not in its roots and development. This is an issue that requires a far more detailed response and exposure than a 4 paragraph post but will get dealt with in the coming weeks and months.

Remember H Paulson is defending the practices and grasp and future reach of predatory finance capitalism. It includes his own financial "tribe" and holdings, since he is not an guru that happens to be a benign neutral balanced player who wears the title of Treasury Secretary at the moment. He is one of sources of the economic problems we have at present

You must have Javascript enabled to use this form.