The IMF to Regulate Ever-More-Popular Sovereign Wealth Funds?

Sovereign wealth funds (check out the Inquirer's coverage of the topic here) have become an important facet of the international economy, so much so that US Secretary of the Treasury Henry Paulson has asked the International Monetary Fund (IMF) to come up with guidelines for how these massive investment funds should be allowed to operate.

The IMF, which is currently wrapping up its annual meeting in Washington, is a financially self-sufficient international organization that oversees currency exchange rates and makes loans to countries facing financial difficulties or crises. 185 countries currently belong to the organization, which was founded at the Bretton Woods Conference in 1944.

While sovereign wealth funds have emerged in China and the Middle East, just recently Brazil, Latin America's largest economy, announced the creation of a $10 billion fund to manage a portion of its national reserves.

Ensuring Kuwait's Future, One $213 Billion Sovereign Wealth Fund at a Time

Bader Al-Sa'ad, a 49-year-old Kuwaiti, is one of many managers who run government investment arms in the Middle East. Kuwait, Saudi Arabia, Dubai, Abu Dhabi and Qatar combined control some $1.5 trillion in government reserves. At the Kuwait Investment Authority, where he manages his own $213 billion chunk, Al-Sa'ad may be busy studying the diversification of major university endowments in the US, but at the same time, he's drawing his money out of the US, on the basis that an economy with 2% isn't worth his time.

So goes the emergence of sovereign wealth funds, the massive capital reserves that governments around the world are now leveraging via the changing rules of international investing.

Henny Sender profiles Al-Sa'ad in today's Journal and reports a number of vital facts about the ways that this single fund is functioning in the progressive Gulf state.

In Kuwait, 10% of the nation's oil revenue is funneled directly into the investment authority, and as Al-Sa'ad puts it, his country doesn't have, other than oil, considerable long-term strategic advantages. (Say, something like cheap labor in China.) In turn, the fund he manages, and the others like it, are meant to sediment a foundation that will last long past the time when the wells run dry.

The Journal plays up Kuwait's taste for assets in Asia. Last year, Al-Sa'ad put $700 million into the Industrial & Commercial Bank of China, and at the same time, he recently sold off 350 Park, a commercial Manhattan property. Where the shifting trend comes through most clearly:

Mr. Al-Sa'ad is cutting the portion of the portfolio invested in the US and Europe to less than 70% from about 90%. "Why invest in 2%-growth economies when you can invest in 8%-growth economies?" he asks.

The article omits outright what has been a chief concern in the rise of sovereign wealth funds, namely, their lack of transparency. As these funds across the world are expected to be worth $12 trillion by 2015, and will thus have immense power in swaying world markets without the protection of oversight or regulation, doesn't a pressing inquiry about propriety lay beyond Al-Sa'ad's trending toward Asian real-estate?

Governments on a Shopping Spree: the Emergence of Sovereign Wealth Funds

The corporatization of government continues with the rise of what's called a sovereign wealth fund. Put briefly: governments have got money, and they're playing the market.

Ever since gold was tossed out as the international standard of value and exchange, countries have held large amounts of foreign currency, called foreign exchange reserves. For instance, as for US dollars, China holds $1.3 billion, Japan $924 million, and Europe $439 million. Only today, instead of sitting on that cash, countries are throwing that money into international investments.

The Economist, in a piece called 'Governments Go Shopping' put it this way:

Go for a walk in Chelsea, an expensive bit of London, and you may stroll by the Coldstream Guards' barracks, now the property of the government of Qatar; a branch of the venerable Barclays bank, soon to be part-owned by the People's Republic of China; and then buy a picnic at Sainsbury's, Britain's oldest supermarket, which the Anglophile Qataris are trying to buy too. What goes for Chelsea may soon be true for neighbourhoods in open economies all over the world: governments are on a shopping spree.

Earlier this summer, US officials started to grumble. Their worry is that these are immense amounts of money (sovereign wealth funds are expected to be worth $12 trillion by 2015) subject to little oversight or scrutiny. The fear of hedge funds has always been that they are too hidden. Sovereign wealth funds are much more shrouded.

A complete portrait has hardly been painted, made clear by a report from the US Treasury that states, "Because relatively little is known about most SWFs, market estimates of their size vary widely."

Emerging markets, in their rise to power, have amassed big foreign exchange reserves. They're ready to play, only, as China recently bought into the massive global bank Barclays, one has to ask: strategically, what kind of new leverage do sovereign wealth funds offer to a new crop of states playing on the global economic stage?