Asset-backed Insecurity

Wall Street, the flagship of capitalism, has been bailed out by state-backed investors from emerging economies. That has people worried—for good reasons and bad.

In Reykjavic almost two years ago the Norwegians were throwing their weight around and the locals were furious. Having spotted that an Arctic boom was about to end, a government-owned fund from Oslo must have thought it had found an easy way to make money in a market it knew well. It began to sell short the bonds of Iceland’s over-stretched banks. Only common sense, you might argue.

Halldor Asgrimsson, then Iceland’s prime minister, did not see things quite like that. Why was the Norwegian state investing hundreds of millions of dollars to undermine Iceland’s economy? Had not both countries signed a Nordic mutual-defence pact against financial destabilisation? “We must protest against this action,” he told Morgunbladid, a newspaper.

On Wall Street in the past few weeks, the sums have been bigger and the actions more benign—at least so far. This week Merrill Lynch and Citigroup became the latest to get the sovereign-wealth treatment, picking up a further $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East. Sapped by the subprime crisis, rich-world financial-services groups have been administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley.

Norse raiders one year and white knights the next, sovereign-wealth funds are as hard to grasp as shadows. In principle everyone welcomes foreign investment. But when the money belongs to other governments, people—especially politicians—are not always so sure. America’s Congress has uttered barely a squeak as Wall Street’s titans have taken foreign cash. But when credit was loose it was alarmed at the state-backed acquisitions of oil companies and ports.

Some funds, such as Norway’s, behave as capitalists bent on making as much money as they can. Others may have “strategic” goals—to nurture national champions, say, or to galvanise regional development. Sovereign-wealth funds are a way to help recycle emerging-market surpluses. And yet suspicion about their motives could make their money much less welcome: rather than accepting investment from sovereign-wealth funds, countries could turn to financial protectionism.

You can see why a call from Canada’s Alberta Heritage Savings Trust Fund may strike you differently from an offer by Venezuela’s Investment Fund for Macroeconomic Stabilisation. The question of what to do with other governments’ money is becoming more urgent by the month. The 29 sovereign-wealth funds monitored by Stephen Jen, an economist at Morgan Stanley who has followed them closely, are now worth about $2.9 trillion.

His list contains a wide range of funds. The Abu Dhabi Investment Authority, of the United Arab Emirates, worth $875 billion, is biggest. But the table also includes the China Investment Corporation (CIC), which last year was sent into the world with $200 billion in its back pocket; and Alaska’s $38 billion Permanent Fund, based on the state’s mineral wealth.

Although sovereign-wealth funds make up only 2% of the world’s $165 trillion-worth of traded securities, they have a lot of firepower: more equity than private equity and more funds than hedge funds. In a paper for RGE Monitor, a research firm, Brad Setser and Rachel Ziemba conclude that the Gulf rivals China as a “new financial superpower”.


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