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Eric Weiner

U.S. hangs out a giant 'For Sale' sign

America's for sale. Just ask Treasury Secretary Henry Paulson.

With the U.S. economy a shambles, Paulson just spent four days touring the Middle East, hat in hand, looking for investors to bail us out. Specifically, on Monday, Paulson met with heads of the Abu Dhabi Investment Authority, the world's largest "sovereign wealth fund" with roughly $875-billion in assets, and encouraged them to buy American businesses.

Of course, it's nothing new for U.S. officials to reach out to the deepest pockets in the world in times of crisis. Just a century ago, J.P. Morgan became an American icon by single-handedly rescuing the financial markets during the stock market panic of 1907.

What is new, however, is that our economic problems have become so big that they no longer can be remedied by a few affluent individuals or investment firms. Only extremely wealthy countries have the resources to clean up this mess. So Paulson is forced to visit flush, oil-slicked Arabian emirates from Qatar to Abu Dhabi and beg for help.

Sovereign wealth funds, or SWFs, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it was a British territory. After World War II, as Kuwait was negotiating independence, its leader, Sheik Abdullah al Salem al Sabah, asked the British to help him create a fund that would invest the nation's oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250-billion in assets and is one of the largest sovereign wealth funds in the world.

Still, It's only recently that SWFs have become major players on the financial stage.

In 1990, the funds held just $500-billion in assets combined. Today, that figure is about $3.5-trillion. That's more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10-trillion, according to estimates by the International Monetary Fund.

The primary reason for this explosion is, in a word, oil. As its price has soared from less than $25 a barrel in 2002 to more than $125 a barrel today, the value of sovereign wealth funds held by oil-rich nations has skyrocketed. And this trend isn't expected to change any time soon.

The new power of SWFs has been on graphic display during our recent mortgage crisis. They've essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20-billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10-billion from a Singapore fund that now controls 9 percent of the bank. Merrill Lynch took in about $11-billion from SWFs from Kuwait, Singapore and South Korea. And even august Morgan Stanley got $5-billion from China's SWF.

These investments are steadying global financial markets by ensuring that none of these key banks goes under. But there are important questions to ask about the increasing influence that sovereign wealth funds have over our economy. As SWFs grow, they will be in a position to control large swaths of the global business world. That means foreign governments, which control the funds, will increasingly own sizable stakes in companies in such important industries as computer technology, aerospace and biotechnology.

These kinds of investments raise "profound questions" of geopolitical power, as former Treasury Secretary Lawrence Summers pointed out a few months ago. Summers' complaint is that there is no way of knowing if there is a political agenda behind a country's investment.

To that end, the International Monetary Fund is trying to draft a code of "best practices" that SWFs can adopt voluntarily. The funds generally have been resistant to the idea, although Abu Dhabi and Singapore have signed an agreement with the Treasury Department that lays out principles for the countries' funds to be more transparent and not politicize their investments.

But the growing influence of SWFs really brings up much more basic concerns. What does it mean for Americans to have decisions about our jobs, our home loans, our school loans and so on to ultimately rest with foreign governments? What does it mean to surrender this level of control over our own economy?

The trouble is, we don't know. And that raises perhaps the most important question of all: What if the cure to our mortgage crisis is more deadly than the disease itself?

Eric J. Weiner is the author of What Goes Up.

U.S. hangs out a giant 'For Sale' sign 06/05/08 [Last modified: Saturday, June 7, 2008 8:14am]
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