Capital Markets

“Bank of Last Resort” Sovereign Funds Pump Out $25.5b

After that 2008 contribution, up 66 percent from a year ago, SWFs now hold $3 trillion in assets.
Stephen TaubSeptember 4, 2008

As the presidential candidates debate America’s challenges in a global economy choked by a credit crunch, one complicating factor is drawing increasing attention: Foreign countries have become the powerful banker of last resort for U.S. and other companies desperately seeking capital.

According to a calculation by Thomson Reuters, sovereign wealth funds from around the world have invested $25.5 billion so far this year, buying stakes in global companies such as Citigroup and Merrill Lynch. That level is 66 percent higher than a year ago, reflecting sovereign funds’ increasing influence in financial markets that have lost investments from Wall Street and European banks hit by losses from risky U.S. mortgages.

In the U.S., sovereign wealth funds, or SWFs, have plunked down $15.8 billion in eight deals, accounting for 62 percent of the global total. This is nearly five times more than 2007’s figure of $3.45 billion, according to Reuters. Russia has attracted the second most amount of money from state-owned funds.

Altogether, SWFs now hold an estimated $3 trillion in assets, according to the report, with much of that money coming from China and other Asian exporting countries, and from oil-rich nations such as Abu Dhabi and Russia. Those countries, in turn, are increasingly putting their large currency reserves to work in an SWF-welcoming world.

Among the most active funds are Singapore’s Temasek Holdings and the Abu Dhabi Investment Authority, which have participated in 22 deals, according to the report. It said that 10 of those deals, together worth $9.1 billion, involving Temasek and another Singapore fund, the Government of Singapore Investment Corp.

Meanwhile, state-owned Korea Development Bank has proposed to acquire 25 percent of Lehman Brothers for as much as $5.3 billion, according to an Associated Press report that cited a local Korean newspaper article.

SWF assets are projected to surpass the stock of global foreign exchange reserves in the not so distant future and to top $7 trillion to $11 trillion by 2013, according to John Lipsky, first deputy managing director of the International Monetary Fund, in a speech Wednesday in Santiago, Chile.

Such sovereign investments, of course, come amid plentiful controversy. Opponents fear that foreign countries will wind up controlling vital U.S. assets, which they believe could affect national security, or that the investments could be based on noncommercial motives.

Sensitive to these concerns, earlier this year a number of funds formed the International Working Group, facilitated by the IMF. At the meeting in Chile, the working group reached preliminary agreement on a set of voluntary practices and principles, referred to as the “Santiago Principles,” Lipsky told his audience. The group is scheduled to present a report at the October meeting of the IMF’s International Monetary and Financial Committee. This ministerial-level committee meets twice yearly, and plays a key role in setting the priorities for developing and managing the international monetary and financial system, according to Lipsky.