Sovereign Wealth Funds and the U.S. financial crisis.

Discussion in 'Economics' started by SouthAmerica, Jun 21, 2008.

  1. .

    June 21, 2008

    SouthAmerica: Yesterday when I was reading The Financial Times I came across the following article “Reject sovereign wealth funds at your peril” by Stephen Schwarzman – Chairman and Chief Executive of The Blackstone Group.

    When I was reading his article a thought came to mind: “ This guy would sell his mother to make a quick buck, never mind his own country.”


    “Reject sovereign wealth funds at your peril”
    By Stephen Schwarzman
    Published: June 20 2008
    The Financial Times (UK)

    Gao Xiqing, the president of China Investment Corporation, China's sovereign wealth fund, spoke last week of his frustration that CIC's attempts at investing outside China sometimes run into political opposition. He went on to add, in words that should act as a chilling wake-up call to many politicians and bankers: "Fortunately there are more than 200 countries in the world. And fortunately there are many countries who are happy with us."

    I have known CIC since it bought a 9.4 per cent non-voting interest in Blackstone when we went public last year. The fact that its president publicly suggests that CIC may invest only where it feels welcome - a view I know many other SWFs share - has serious implications for the economic wellbeing of the US and other western countries where political opposition to SWF investments has mounted.

    From the point of view of a rational economist, this is frightening. It is difficult to think of how much worse off we would be in the current financial crisis without SWFs. Many of our commercial and investment banks have taken large hits to their balance sheets because of bad investments. The capital infusions from SWFs have enabled them to strengthen their balance sheets. Since the fourth quarter of last year, SWFs have poured about $55bn (€35bn, £28bn) into US and European financial institutions to the great benefit of their shareholders. That is a very good thing. Using SWFs to recycle the holdings of countries with large surpluses in the west, which needs the capital, rather than keeping that money at home, is a huge benefit to us.

    CIC is not alone in its frustration with political grandstanding on SWF investments in the west. When I talk to some of the SWFs (and I have been dealing with them for more than 20 years), they are both amazed and annoyed that their actions, which are such a positive for the US economy, have been met with such hostility and anger in some quarters. They have not done anything wrong; they are acting the same as any domestic pension plan or university endowment in a search for an acceptable return on investment.

    This hostility is dangerous because we are reaching a stage in the global economy where, as CIC says, SWFs have other options. They could sell US equities or bonds, for example, and buy from other nations. This is not a threat but simply the SWFs following their own self-interest in search of the most hospitable investment environment.

    The US is the world's largest debtor nation and we are now in an uneasy relationship with our creditors. We cannot afford to get this wrong. The current account deficit is 7 per cent of gross domestic product - double that of the Reagan years. This makes a significant number of countries big holders of dollar reserves. They invest those reserves in part through financing a significant portion of the federal debt. Because foreigners are willing to buy Treasury debt in quantity, the Federal Reserve is able to keep interest rates low. If we were forced to rely mostly on domestic borrowing, we would have to pay very high interest rates. The consequences would be increased inflation, a dollar falling even faster and very slow (or negative) economic growth. If the investment climate for SWFs is poor in the US, the countries with large dollar reserves (which are the owners of most of the SWFs) could also look for alternatives. The euro already is proving increasingly attractive as a reserve currency instead of the dollar and that alone should be of deep concern.

    To alienate the managers of these SWFs could have severe consequences if they and their owners seek friendlier alternatives outside the US. Even the current talk of disclosure requirements is seen by some SWFs as problematical since it often fails to take into account the political realities in some of the countries managing SWFs, where their ties to the west are best left unstated lest they arouse domestic political opposition.

    When capital withdraws, it does so without notice or fanfare. Imagine a private meeting in a room far from the US; a decision is quietly made and billions of dollars that were invested here find a new and more hospitable home. Or billions of dollars that could have been invested here are reallocated to other more benign markets. Sixty years ago, we conducted a painful, expensive and accidental experiment called the Great Depression, with the Smoot Hawley tariffs to teach us the value of free trade. Let us not subject ourselves to another painful lesson in the value of direct investment and the free flow of capital by driving SWFs away.


  2. You could have just said that SWF's are welcomed during bull markets and rejected during bear markets.
  3. .

    Nassdack: You could have just said that SWF's are welcomed during bull markets and rejected during bear markets.


    June 21, 2008

    SouthAmerica: I can tell that you have missed the point by your reply.

    Last December I did answer a question from Billdick that is relevant to this thread and also answer your question.

    When I wrote my article about China’s Sovereign Fund investing US$ 200 billion in Brazil, I did not suggest that they buy and control Brazilian companies that are trading in the stock exchange.

    I did suggest the creation of a new company in Brazil controlled by the Brazilian government receive the investment and guaranty the payback plus interest to the Chinese government.

    You can read about my plan on the following website:

    “The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil”
    Part 1 of 4
    Written by Ricardo C. Amaral
    Sunday, 30 September 2007

    “The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil”
    Part 2 of 4
    Written by Ricardo C. Amaral
    Thursday, 04 October 2007

    “The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil”
    Part 3 of 4
    Written by Ricardo C. Amaral
    Wednesday, 10 October 2007

    “The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil”
    Part 4 of 4
    Written by Ricardo C. Amaral
    Tuesday, 16 October 2007

    If the US financial system were not on its knees today and begging for money, money from any source, then the American people would be watching very closely the investments made by foreign Sovereign Investment Funds here in the US economy.

    Today nobody is really watching the store in the US – and the system is getting completely out of control – and they have a new way of managing the US economy it is called “Panic Management.”

    Here is what I wrote a few months ago:


    December 22, 2007

    SouthAmerica: Reply to Billdick

    I remember many years ago when I worked for Prudential Reinsurance in New Jersey and I did all their international accounting and consolidated the international subsidiaries and international joint ventures – one of the major subsidiaries of Prudential at that time it was the Prudential Insurance Company in Brazil.

    Why am I telling you this old story from years ago?

    Because since I was involved in that business I had to learn a lot of stuff about the insurance business in Brazil and so on…. One of the things that I learned at that time was that a foreign company just could invest in the insurance business and in the banking business if they bought the outstanding shares of another foreign company – at least at that time (the late 1970’s) it was against Brazilian law for foreign companies to invest in new shares of Brazilian insurance companies and also in the banking sector.

    The reason for that kind of rule it was to protect the companies operating in Brazil from foreign companies being able to decide which companies in Brazil would get financing when they need it. If foreign companies could decide which companies inside Brazil were going to be able to borrow money and which companies would be blocked from lines of credit that could cause a problem for many companies operating in Brazil.

    The insurance companies also were out of bounds to foreign investors because they did invest large amounts of money and they could influence the stocks that they had on their portfolios and the amount of credit available for other business purposes.

    The situation here in the United States is getting so desperate right now that nobody in the US is saying much about all the foreign money that has been invested in major US banks such as City Group or investment banks such as Bear Stearns, and the other investment banks that are in deep financial trouble.

    It is one thing to invest in ports, in Rockefeller Centers and golf courses – it is another thing entirely different when foreign companies are investing in the banking system and in other areas that are responsible for allocating capital in the US economy such as the major investment banks.

    I am not being protectionist here – It’s just a matter of using common sense.

    Now talking about a complete lack of common sense that eventually it will cost trillions of US dollars and it will have a major impact in the future of retirement in the United States – some moronic people changed the rules regarding pension funds a few years ago and they started letting the pension funds invest US government insured money in hedge funds as a quick fixer up to the pension funds that were underfunded to start with.

    These fools let the pension funds invest in hedge funds in the illusion that these hedge funds above average returns would save the day for the pension funds. (The people involved in that kind of rescue plan for the pension plans are a bunch of morons who will cause the pension funds to lose even more money and be even in worse shape than before.)

    I will not be surprised to find out that the hedge funds lost a fortune in new pension money that were gambled in the current sub prime mess – I am saying new pension money because the pension plans lost 2 trillion dollars during the last telecom and meltdown.

    I wonder how much government insured pension money has been pissed away by the hedge funds in the current sub prime scandal?

    I used to believe that the free market and Wall Street were the best vehicles for allocating scarce resources – but today I know that all that it was just a bunch of bullshit - and all I have to do is look around and remember a few fiascos that have cost trillions of US dollars of mostly pension money that disappeared forever here in the US such as: the savings and loans debacle of the 1980’s, the telecom and meltdown of the year 2000 and the complete lack of common sense related to the latest sub prime scandal.

    There is one thing I know for sure these trillions of US dollar that have melted away are moneys that millions of Americans who still are working today are counting on that money in the future as part of the pension money to survive and they think that their money have been invested in a safe place.

    Millions of Americans are going to have a nasty surprise regarding their pension money in the coming years.

    The fact that we have had idiots running things in Washington since the Clinton administration left town it is no secret and it is obvious to anyone with a minimum of common sense. I guess the incompetence of the US government it is contagious and did spread also to Wall Street – and they have the billions of losses to prove it.


  4. You tell a good story and raise valid concerns.

    The phrase which comes to mind is, "If you can't spot the chump in the deal you're it."

    Todays sub prime crisis is a perfect example. An virtuous circle of easy money and easy profits driven by a need to compete and reinforced by a not so benign conflict of interest centering on loan originations. The financial rocket scientists who evangalized this market all got paid. Their employers and customers were left holding the bag.

    What makes anyone believe that SWF's are going to be any smarter with their investments than the banks who distributed petrodollars in the early 80's based on the concept of "soverign loans". Maybe SWF's have better trained (or better controlled)financial rocket scientists?
  5. .

    FreeMarketRider: The financial rocket scientists who evangalized this market all got paid. Their employers and customers were left holding the bag.


    June 22, 2008

    SouthAmerica: There is a major difference here between the scam artists that designed the sub-prime mess (the entire scam system was possible because it was based on pure greed at all levels) and what can be accomplished by a SWF since these funds can be used for various purposes and not necessarily be based on return on investments..


    FreeMarketRider: What makes anyone believe that SWF's are going to be any smarter with their investments than the banks who distributed petrodollars in the early 80's based on the concept of "sovereign loans". Maybe SWF's have better trained (or better controlled) financial rocket scientists?


    SouthAmerica: A SWF can be used for various purposes including using the money to undermine the financial system and industrial base of its competitors.

    In the case of China things it has not work so well so far – but China has accumulated so far about $ 1.4 trillion US dollars (Confetti), and very soon they will be holding about $ 2 trillion US dollars worth of confetti.

    Here is what happened to China’s $3 billion US dollars investment in Blackstone on June 25, 2007 when that company went public at $ 35 per share – since then the investment it has not done very well since that stock has been trading around $ 18 per share exactly one year later.

    China’s original investment at the time of The Blackstone Group IPO on June 25, 2007:

    85,714,000 shares @ $ 35 per share = US$ 3,000,000,000 ($ 3 billion US dollars)

    China’s current value of the investment as of June 20, 2008:

    85,714,000 shares @ $ 18 per share = US$ 1,542,852,000

    With performance like that no wonder Stephen Schwarzman the Chairman and Chief Executive of The Blackstone Group wants the cash flow to keep coming from the SWF's.

    I don’t know how his company managed to lose 50 percent of the Chinese money in the last year, but I am sure that in the meantime he managed to get a fat bonus based in all kinds of fees for himself and his associates.


    But here is the danger of letting SWF investing a lot of money in strategic areas of your economy such as in the banking system, investment banking, and insurance sectors. These sectors control a lot of money on behalf of their clients, and the way these moneys are invested and also the direct allocation of the money they manage inside the economy in case of direct borrowings by any type of company gives this sector a lot of power.

    Banks, investment banks and insurance companies play a big role inside the economy in the decision of which companies get finance and which companies get starved to death. And when you control these sources of financing you have a lot of influence.

    The fools in Wall Street usually make their mistakes or run their scams based on greed, but SWF can have other things and purposes in mind other than the profit incentive or return on investments; they can run these funds with political or long term economic objectives in mind.

    Many people on Wall Street are too busy trying to squeeze every last drop of blood out of the US economic system and they can’t grasp the potential impact that these other long-term strategies can have on the American economic system.

  6. sovereign wealth funds are owned by the STATE

    the fact that these large institutional funds can influence the markets means they should be regulated by the gov't

    a gov't regulating limits by a gov't invesment fund.

    all participants are identified and fingerprinted in buying and selling of all securities or assets.

    banned on 'market manipulation' by a single institution is the law in US market...limits on foreign ownership of strategic assets are a political reality and is not a tarriff.

    these managers should know better about 'politics' since they are a political fund.

  7. Sovereign wealth funds are long oil and commodities and ABC long. both were in a bubble until it burst..

    that is the influence of these LARGE investment hedge funds.

    citibank is shutting down it's old lane ' hedge fund'.

  8. the stephen scharzman put in other worlds

    take the money or we will make your economy suffer if you don't take our money or sell us your assets.

    don't ever threaten gov't or regulators.

  9. Of course the US is reluctant to take China's dollars. They can print their own. They don't want to sell their industry to China to receive paper they can print themselves. And that's the exact reason China DOES want to invest in the US. They have all these dollars that are becoming less worth every single day. They don't want that bag of dollars to become worthless, so they want to invest it back into the US.