Attack of the Sovereign Wealth Funds: Defending the Republic from the Threat of Sovereign Wealth Funds?
52 Pages Posted: 18 Jan 2010 Last revised: 3 May 2010
Date Written: January 15, 2010
In this article I consider the recent phenomenon of Sovereign Wealth Funds (SWFs) - what they are, where they came from and why, despite their 50 years of existence, they are just now becoming of great public interest and concern. SWFs are funds of investable foreign currency owned by sovereign entities. They are in many ways similar to, but distinct from, state owned enterprises (SOEs). There are currently more than 50 SWFs controlling nearly $4 trillion in assets which are available to be invested in international markets. SWF investments may be in bonds, equities, real estate and other alternatives. Since 2003 SWF and SOE investments in the U.S. have grown rapidly and have been deemed by some as threats to America.
Investments in the United States by foreign parties may be subject to review by a U.S. government agency, the Committee on Foreign Investment in the U.S. (CFIUS). For more than 30 years this Committee has had the power to investigate proposed investments by foreigners in the U.S. and, in the name of protecting national security, to preclude or impose conditions upon such investments under certain circumstances.
This article analyzes two recent, highly controversial, ultimately unsuccessful, U.S. investment attempts by a SWF and an SOE and the massive investments in 2007 and early 2008 by a limited number of the largest SWFs in some of the world’s largest financial institutions. Within months these investments of more than $63 billion had lost more than two-thirds of their value. How the SWFs reacted to these losses and to the current economic crisis is reviewed as an indicator of the threat they pose to the national security of the U.S.
The SWFs’ Santiago Principles, which were announced in late 2008 as a response to the SWF/SOE threat these entities pose are evaluated. The article concludes with a more detailed look at the recent investing by Chinese SWFs and SOEs, deemed by some to be the most threatening, and concludes with an assessment of the actual risks the U.S. and other nations may face in the next decades from SWFs and SOEs.
Keywords: Sovereign Wealth Fund, State Owned Entity, China, Economic Crisis, Russia,Abu Dhabi, Dubai, China Investment Corporation
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