Friday, February 22, 2008

Sovereign Wealth Funds: Altruism’s Road to Hell?

Touted as the primary means of revitalizing an ailing “economic system”. Do Sovereign Wealth Funds really help more than they inevitably hurt?


By: Vanessa Uy


Billionaire investor George Soros is one of those people who really have a high praise for Sovereign Wealth Funds. But how many of us have the investment savvy of George Soros? And most of all; will Sovereign Wealth Funds – if properly (and ethically?) used – help alleviate our current (2008) global economic slowdown? But first, a brief primer on what is a Sovereign Wealth Fund.

A Sovereign Wealth Fund is a fund that is owned by a sovereign state. These are usually composed of financial assets such as stocks, bonds, property or other financial instruments. Sovereign Wealth Funds are broadly defined entities that can manage the national savings for the purposes of investment. These pooled funds may have their origins in, or may represent foreign currency deposits, gold, Special Drawing Rights and International Monetary Fund (IMF) reserve position held by central holdings. In other words, Sovereign Wealth Funds are assets of sovereign nations, which are typically (but not necessarily) held in domestic and different reserve currencies such as the dollar, euro, and yen. The names attributed to the respective management entities may include central banks, official investment companies, state pension funds, sovereign oil funds and so on.

Even though it’s really beyond reproach that Sovereign Wealth Funds can save an ailing company or an “economic system”. But the problem of evil rearing it’s ugly head comes along when investors who are controlling a typical Sovereign Wealth Fund can now dictate the company’s policy – which they now own by the way and they can fire / replace the company CEO if he or she doesn't fall in line. Never mind the ensuing massive layoffs that typically occur if the “new management” thinks that this move will “streamline” the company.

This is why some countries are staunchly “Protectionists” when faced with the prospects and / or threats of Sovereign Wealth Funds. Imagine if The People’s Republic of China’s Sovereign Wealth Funds allowing the Beijing Government access to Lockheed Martin’s “Proprietary Trade Secrets”. And what about the Sovereign Wealth Funds of “Despotic Arab States”, are we ready to face another “New World Order”?

And then there’s the issue of corporate ethics and the latest corporate buzzword “Corporate Social Responsibility”. I’ll bet a number of us are wondering if their pension funds are used by the US Central Intelligence Agency to underwrite their “Extraordinary Renditions” program which sadly existing Sharia Banking Laws didn’t mention (preach?) about the sins of investing one’s money in the “Military – Industrial Complex”. Those of us who are weary of the evils of Capitalism should take a stand now.

1 comment:

Viktor said...

Recently, the US Government - and even the International Monetary Fund - are calling for a voluntary code of conduct for Sovereign Wealth Funds, which at present, is what's been keeping Wall Street afloat. The call for a voluntary code of conduct is mostly due to the growing concerns over the power of Sovereign Wealth Funds.
To me, Sovereign Wealth Funds should serve only as "instruments of commerce" and not be used to achieve political ends by allowing sovereign governments to gain an unfair leverage. But unfortunately, this is not always the case. The Iranian Revolutionary Guard - being named by the US Government as a terrorist organization because they actively provide technical and material support to Iraqi Shia insurgents - is the majority shareholder of Iran's own Sovereign Wealth Funds. Like Hedge Funds and Private Equity Funds, Sovereign Wealth Funds badly needs further regulation. Who knows what percentage of credit and bond derivatives currently circulating are actively funding Osama Bin Laden's al Qaeda?