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Bayh: Sovereign Funds Serious Risk to U.S.
February 13, 2008 Money News.com
Evan Bayh, the Indiana Democrat and chairman of the Senate’s banking subcommittee on security and international trade and finance, this week urged Congress to enact formal rules on sovereign wealth funds.Sovereign funds — money pools controlled by foreign governments — have made billions of investments in U.S. banks and corporations in recent months.

Now bigger than hedge funds, 28 countries control now more than $2.8 trillion. Investment banks estimate that figure could reach $12 trillion — nearly the size of the entire U.S. economy — in eight years.

Writing in the Wall Street Journal, Bayh argued that while foreign investment is important to America, the lack of regulation is a huge risk that the country cannot continue to run.

Bayh pointed out that the idea of our own government buying up bank stocks would be shocking, even called “socialism,” yet we seem less concerned about foreign governments, some of them nominally communist, owning large chunks of major Wall Street banks.

“As Americans, we realize the folly of allowing our government to own our private companies, yet paradoxically, some appear far less alarmed by the prospect of another country’s government doing the same,” Bayh wrote.

Bayh wrote that foreign investment has been a key driver of economic developing since the first British colony at Jamestown, in 1606, before the country’s founding.

The forefathers understood the importance of welcoming outside financial support.

“It would be folly to prohibit these investments. Allowing funds to be reinvested in America mitigates the consequences of transferring so much wealth abroad for energy and consumption,” Bayh wrote.

“It also strengthens our economy, creates jobs, improves productivity and keeps interest rates low,” the senator wrote.

Yet now it is governments, not companies, making the investments, a crucial difference, Bayh wrote.

Meanwhile, the current atmosphere of low regulation and massive sovereign investments into U.S. companies raises serious questions –- questions almost no one seems willing to ask.

It’s a serious risk, Bayh wrote.

“Sovereign nations have interests other than maximizing profits and can be expected to pursue them with every tool at their disposal, including financial power,” the senator wrote.

“For this reason, Congress must establish standards for transparency and behavior now to prevent unwarranted interference in our economy by foreign governments,” Bayh wrote.

Waiting for a world agency to step in would be a mistake. Bayh wrote. The United States must promulgate and enforce its own rules.

“It would be a mistake to give a multinational organization like the International Monetary Fund responsibility for oversight, because the IMF lacks enforcement power and has proven ineffective in discharging many of its current responsibilities,” Bayh wrote.

The answer, Bayh wrote, is to require government-run investment funds to invest “passively,” without taking management roles or board seats in the companies in which they chose to invest, as Gulf oil states have long done.

Of particular concern are the rising profiles of formerly or nominally communist nations now investing heavily or about to invest in U.S. corporations.

“Russia’s recent behavior and China’s drive for economic advantage -– including rampant intellectual property theft, currency manipulation and subsidies for manufacture and export -– raise serious concerns about how sovereign funds might be used,” Bayh wrote.

Bayh noted that there are rules regarding investment review, but that they are normally triggered at the level of 10 percent ownership.

And, he wrote, influence over a company can be had simply by being a large shareholder without necessarily controlling board seats -– if the company is desperate enough for cash.

“If sovereign wealth funds become the global investor of last resort, recipients of their largess in times of distress will have enormous incentives to comply with all manner of requests,” Bayh warned.

“American business often works in this informal way, and we should anticipate that deals involving foreign governments will be no exception,” he wrote.

Bayh is not against globalization of capital. The freer movement of money bring benefits, including to the U.S. economy.

However, oversight, Bayh wrote, is sorely lacking.

“Occasionally, foreign governments will have agendas different from our own. They will pursue them using all resources at their disposal, including financial levers,” Bay wrote.

“No great nation can permit such interference with its sovereignty.”


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