BIDEN on Sovereign Wealth Funds: ‘What are the Threats, Opportunities and Challenges Along the Way?’
BIDEN: “These Funds exist and are growing because, in my view, we have no national energy policy, no coherent trade policy. Short-sighted restrictions on international investments won’t eliminate those underlying problems. We need to be smarter, more strategic, and more long-term in our thinking. And we need to get our own house in order to reduce our economic vulnerability.”
June 11, 2008
Washington, DC – Chairman of the Senate Foreign Relations Committee Joseph R. Biden, Jr. (D-DE) held a hearing this morning entitled, “Sovereign Wealth Funds: Foreign Policy Consequences In an Era of New Money” to discuss the implications of the rise of Sovereign Wealth Funds (SWFs) for U.S. interests and foreign policy as well as the pros and cons for establishing guidelines for SWFs operations.
Sovereign Wealth Funds, which are investment funds owned and managed by national governments, have increased considerably in recent years. These investments have become particularly concentrated in U.S. financial institutions, totaling $37.9 billion in 2007 alone. There is a growing concern among U.S. analysts and members of Congress that foreign countries will use their SWFs to secure political influence by taking strategic stakes around the world in critical markets such as telecommunications, energy resources, and financial services.
The Committee heard testimony experts in the field, including Professor Jagdish Bhagwati of Columbia University, Professor Daniel Drezner of Tufts University, and Mr. David Marchick of The Carlyle Group.
The full text of Sen. Biden’s opening statement from this morning’s hearing is below.
“As most Americans know all too well from their trips to the gas pump, record oil prices are now overtaking the housing crisis at the top of our list of economic worries.
“On top of weakness in consumer and financial markets, now we have the threat of inflation, rooted in energy prices, adding to the pain and complicating the task of restoring growth and stability to our economy.
“There is another effect of those high oil prices and of our continuing dependence on imported oil. That is the historical shift of wealth from our country to the oil producers, from Russia to the Persian Gulf.
“At today’s prices, the United States is sending $800 million to OPEC, every day of the week.
“In exchange for tankers full of their oil, we are sending them boatloads of money. Their bulging treasuries have now become powerful investment tools – so-called Sovereign Wealth Funds, a phrase which most Americans have not heard, even though these funds have been around since the 1950s.
“In addition to those oil-based funds, other nations, such as China, with export-based economic strategies, are accumulating their own large piles of our money, which they are using to buy assets around the world.
“Today the Committee on Foreign Relations will look at Sovereign Wealth Funds and examine their foreign policy implications. I want to thank the Ranking Member, Senator Lugar, for urging that we focus on this issue.
“Sovereign Wealth Funds are not new. In fact, the first Sovereign Wealth Fund was established by Kuwait in 1953. Yet, only recently have they found themselves in the public eye.
“This is partly due to the fact that they are big and getting bigger. Today, analysts estimate these funds are worth between $1.9 and $2.9 trillion. By 2012, experts predict they could control $12 trillion worth of assets.
“What should we make of this? Should we be concerned when the governments of Russia or China control billions of dollars in assets and directly invest in U.S. institutions and companies? What threats does this expose us to? What financial imbalances does this create?
“The IMF has called for an international effort to increase transparency – where is this money coming from, who controls it, where is it going?
“Some senior officials in this Administration seem to consider Sovereign Wealth Funds a serious risk. Director of National Intelligence Michael McConnell said in testimony in February: ‘Concerns about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to achieve political ends’ represent a major national security issue.
“From a financial perspective, however, these funds could be an important source of capital in our global economy. Wealth Funds can bring benefits to our economy. They have helped keep our banks afloat in the midst of the subprime mortgage crisis and ensuing credit crunch. They could offer fresh infusions of capital that fuel employment and stimulate U.S. industry. When Citigroup needed capital to stabilize its balance sheet after the subprime mortgage crisis, the Abu Dhabi Investment Authority injected $7.6 billion for a 4.9% stake that bailed out the bank.
“In fact, in his recent trip to the Gulf, Secretary of Treasury Hank Paulson struck a very different tone than McConnell on Sovereign Wealth Funds: ‘America will keep our markets open at home to investment from private firms and from sovereign wealth funds…We reject measures that would isolate us from the world economy.’
“Threat or opportunity? That is what everyone is asking. Sovereign wealth funds have more than one dimension. They defy simple definitions and simplistic responses.
“I have called this hearing so we can get a better understanding of these Funds – what are the threats, opportunities and challenges along the way? As we move forward, I believe there are three issues we should bear in mind.
“First, we need a strategy to identify and to deal with Sovereign Wealth Funds which use their assets to achieve political objectives. We have already seen indications that Russia may be using its Fund to promote strategic objectives, such as its recent interest in acquiring a large stake in Airbus’s parent corporation.
“Similarly, Singapore’s Temasek Fund has been linked to political turbulence in Thailand and Indonesia. What should be our response? Greater transparency alone, in my opinion, will not resolve this issue.
“But punitive, defensive regulation could be self-defeating, depriving us of potential benefits out of fear of potential harm.
“Second, it seems to me that we must strike an appropriate balance between protecting against threats and remaining open to economic opportunities. While we cannot overlook the national security implications of Sovereign Wealth Funds, neither can we overlook their potential to provide needed investment and resources.
“Finally, as we develop a policy towards Sovereign Wealth Funds, we should be careful not to confuse the symptom with the cause.
“What I mean is that these Funds exist and are growing because, in my view, we have no national energy policy, no coherent trade policy.
“Short-sighted restrictions on international investments won’t eliminate those underlying problems. We need to be smarter, more strategic, and more long-term in our thinking. And we need to get our own house in order to reduce our economic vulnerability.
“Let me emphasize that I hope our listeners do not confuse our interest in examining sovereign wealth funds—and determining whether they are good or bad for us—with our interest in defining and addressing their underlying causes. Until we deal with the reasons why sovereign wealth funds are here in such numbers, we will have a much bigger problem on our hands than their mere existence.
“Our panel today is in a good position to offer ideas and advice on Sovereign Wealth Funds.
“Professor Jagdish Bhagwati from Columbia University is a noted economist and well known financial commentator. He is particularly well placed to discuss Sovereign Wealth Funds in the context of globalization.
“Professor Daniel Drezner comes from the Fletcher School at Tufts University. He will provide a political science perspective to the Sovereign Wealth Fund issue.
“Finally, David Marchick, currently at The Carlyle Group and a former official in the Clinton Administration, will offer a U.S. business perspective on Sovereign Wealth Funds.”
