Sovereign Funds: The writing on the wall…
Rachel Ziemba
Note: This post is from Rachel Ziemba, not Brad Setser.
“Like private firms, pension funds, and other institutional investors, Abu Dhabi’s investment organizations have always sought solely to maximize risk-adjusted returns. …The Abu Dhabi Government has never and will never use its investments as a foreign policy tool.”
So writes Yousef Al Otaiba, the Director of International Affairs of the Abu Dhabi Government in a letter to Treasury Secretary Paulson, other G7 finance ministries and international institutions. The letter which expresses Abu Dhabi’s investment guidelines is unprecedented as a public response from sovereign funds, the government investment funds of many countries that have been under the spotlight. These funds are large - Brad Setser and I have estimated they manage $2 trillion - and growing - they could add $500 billion this year. In 2000, they managed around $500 billion. The availability of funds (including leverage) has helped them make higher profile purchases in search of higher returns. After all, sovereign funds respond to a desire to diversify assets and make higher returns than those possible with holdings of US and other government bonds. They are increasingly a go-to capital source. Just today, Dealogic suggested that they accounted for $48.5 billion in cross border M&A in 2007 and about $24 billion so far this year. In 2006, it was $19 billion. Their investments in fixed income, smaller equity stakes and alternatives are even larger.
The following graph - which adds the Russian oil stabilization fund and Saudi Arabia’s non-reserve foreign assets to that of dedicated investment funds of Asia, the Gulf and Norway- gives a sense of how quickly these funds have grown. Oil’s surge has fed the growth of sovereign funds 3/4 of the assets managed by sovereign funds are oil funds. About half of the almost 20 funds that we routinely track were created after the year 2000. Sovereign wealth really is a new superpower.
As estimates of SWF assets proliferated, so have concerns from policymakers (summary here) questioning how the prominence of state-directed investors will affect the financial system. Sovereign wealth funds now seem to be responding to concerns. The head of Singapore’s GIC suggested in December that it might increase disclosure. Other funds already disclose more about their holdings, management and investment decisions - Norway, Temasek, the funds of Alberta and Alaska. Even China has been a little more publicly conciliatory to the process. But most are likely wary of having the rules dictated to them. This is the time to play a part in fashioning the rules both at the IMF and in the public domain. Sovereign wealth funds will likely be a big topic at the IMF/WB spring meetings - though systemic risk and a deteriorating global outlook will loom large.
Abu Dhabi’s investment strategies.
- To operate for the public good, generating long-term, attractive returns for the prosperity of the people of Abu Dhabi.
- To operate as strictly individual entities, making independent, commercially driven investment decisions.
- To follow meticulously all of the laws, regulations and rules of the countries and exchanges in which investments are made.
- To meet all disclosure requirements of relevant government and regulatory bodies in countries in which they invest.
- To maximize risk-adjusted returns, relative to well-established market indices.
- To recruit and retain world-class financial professionals either as in-house or external managers.
- To invest with a long-term perspective.
- To invest in a well-diversified portfolio across asset classes, geographies, and sectors.
- To maintain appropriate standards of governance and accountability.
All of this seems positive - exactly the sort of actors one seeks in today’s credit crunch. Its also basically consistent with what the funds have been saying; that they are long-term investors, primarily portfolio, with commercial motivations. And its worth noting - none of the officials worrying about sovereign wealth funds can actually find an example of funds acting for political - not commercial - reasons, but they worry that the possibility might arise as funds grow.
Furthermore - these guidelines address some concerns but they likely do not go far enough. A key part of disclosure is knowing the size, asset allocation and currency composition (at least roughly) so that one has a sense of the scale of investments and likely responses. With the size of assets under management, a strategy shift could move markets. Even though it might not be in a funds interests to liquidate, understanding the broad nature of positions helps to assess systemic risks.
As funds grow - a calculation dependent on oil revenues, investment returns and the share of official foreign assets entrusted to sovereign funds. Since the official assets are growing at a fast pace - Saudi Arabia and China alone added over $70 billion (valuation adjusted) in official assets in January- deciding how to respond to these flows in a way that keeps funds investing is necessary. Though some countries are spending more domestically.
The letter is thus significant for several reasons.
- By all accounts Abu Dhabi’s Investment Authority is the largest sovereign wealth fund. Getting it on board is necessary for the voluntary code to succeed. It may thus want to be seen as a leader - as Singapore does also. While it may not manage as much as the circulating $900 billion estimates, it still likely manages over $600 billion.
- It is the first significant public statement from the Abu Dhabi government which tends to disclose very little - ADIA for example makes almost no public statements. We tend to draw on press reports (Euromoney and NYT).
- A broader notion of government investment. It’s not just about sovereign wealth funds - The letter describes the overall investment guidelines of the Emirate. Abu Dhabi, like other emirates has created a set of complementary (and possibly competing) entities to diversify their savings and contribute to economic development. The Abu Dhabi Investment Council seems to be intended to oversee investment. Mubadala, an investment company is a direct investor. Abu Dhabi’s energy companies (IPIC and Taqa) also invest overseas.
- More predictability from both sovereign funds and the countries in which they invest likely benefits all.
The release of the letter implies that they are recognizing that not all the negotiations can happen behind closed doors, in bilateral or multilateral negotiations. Transparency could go a long way to lessening fears about links with government and risk management. After all, we could use more transparency from a range of private sector actors - if there had been less of an information deficit, we might not be in the current credit crunch. But there are separate issues raised by an opaque government actor than by an opaque, highly leverage private financial institution.
Likening themselves to institutional investors - which many resemble - is an attempt to shift the debate. Many long-standing sovereign wealth funds are surprised to find themselves called sovereign wealth funds. Ultimately there may be too much naming and finger pointing - what’s important is investment strategy and how decisions affect other market participants. Abu Dhabi mentions that its objectives make it is akin to a public pension fund or institutional investor. Where they differ, however is that it is unclear how it is accountable to the ultimate beneficiaries.
But, while this is significant, its not exactly a done deal. Chip Cummins notes that while the emirate’s investments are primarily passive investment with small stakes, it does not rule out increasingly active stakes in the future. Furthermore, it doesn’t express guidelines for voting, management etc. Also - and this may be setting the bar too high - but it focuses on the past but doesn’t rule out anything in the future. Abu Dhabi’s state owned enterprises are more likely to be involved in active management than ADIA.
So what does this all mean - does it give us more indication of changes to the investment regime?
Perhaps not yet.
Ultimately this may be a part of setting the ground rules for more detailed negotiations. The IMF board will discuss its draft paper this week. It also plays a role in educating the public who have been wary about sovereign funds. Current US and European discussions seem geared towards making sure that something usable comes out of the IMF discussions.
Sovereign funds are unlikely to go as far in disclosing information as the Europeans suggested (strategies, source of fund, leverage, holdings etc) but likely provide more detail to back up what ADIA suggests. Sovereign funds might also agree to share more information with the authorities where they do business - and international institutions - than with the general public.
But some people though think transparency and disclosure is insufficient. Proposals (see here for a summary) are starting to emerge on limiting voting rights, restricting sovereign funds to non-controlling shares, changing tax incentives on specific deals and the portfolio investments of government entities.
Entrusting the bulk of assets to external managers (as ADIA has done with 80% of its assets) does seem to answer many of the concerns raised about voting and controlling stakes. Outright restricting sovereign investors (or those voting on their behalf) from investment might just lead to funds being channeled through other vehicles. Stripping voting rights would remove a key and transparent means of influencing corporate governance whilst allowing the public to assume that unofficial influence is granted. But disclosing general principles about whether funds vote and in what cases seems appropriate.
One possible outcome - Differentiation between sovereign entities, with funds that disclose being treated in one way, and those that are more guarded treated another. This already happens in the court of public opinion. With Foreign official institutions investing more abroad - The TIC data as summarized on RGE’s economonitor shows how they financed the US in January- walking the fine line of encouraging investment whilst protecting national security and ways of doing business becomes more important.
Nice graphic… I wonder to what extent that growth has come from new cashflows vs diversion of cashflows that existed before 2000. It seems plausible that almost all the SWF growth outside of Asia has been funded by the quadrupling of oil prices since 2003.
This all sounds quite nice, but isn’t the driving factor going to be investee (as opposed to investor) countries need for capital? With this amount of money available what government is going to want to make life harder for these funds when they can move their money elsewhere? And what if the funds decide to collaborate (either implicitly or privately explicitly) and just not invest in markets that put up the conditions you’re suggesting?
The proof will be in the pudding. Suppose a group of SWF’s get together, say Saudi Arabia, China, and Japan, under the auspices of protecting their dollar denominated investments. Their terms? Stabilizing the dollar by requiring the US to permit sales of assets now off limits: defense, energy, infrastructure, media, etc. In essence, their demand would be for the US to sell off the commanding heights of its asset base, reminiscent of the “non-political” sales demanded of third world countries by the IMF. Remember, the SWFs are still just being prudent investors with no political motivations.
Nonetheless, by owning a significant portion of US government debt and key chunks of its industrial base, SWFs would be one step away from making the US a protectorate, like 19th century colonies that had proven incapable of managing their own financial affairs.
mitchell - Good point. oil funds account for about 3/4 of sovereign wealth funds today - and without the CIC the share would be higher. Almost all of the increase in funds from 2000 is new money not the reallocation of existing foreign assets or investment returns.
Guest - I’ve been suggesting for some time (in the next blog down) that leverage to set terms is limited by the need for capital. some investors could shun countries or sectors that are blocked. the G7/EU has been pretty united on calling for more transparency
Furthermore - as long as China and the GCC are reluctant to let currencies appreciate, they need to buy US assets - these won’t necessarily be US treasuries though
the balance sheets of financial institutions and outlook probably inspire as much caution as asset protectionism fears.
Brad argued recently that the US still has leverage in part because few other countries able to absorb the surpluses.
Perhaps this comment is of limited utility, but: which SWF couldn’t have written that letter? It is interesting that Abu Dhabi was the first to make a public response but the content, in my view at least, is identical to what any other significant SWF would have written. That commonality of intent underscores, in my mind, a couple of points that are rarely considered in discussions of SWF intentions. First, SWF managers are almost wholly concerned with finding places to put the money: active management participation, board membership (in some cases, even voting the stock)et al is tsuris they don’t need - they have a larger problem just putting the assets away. Second, ex-Norway, no SWF is operating from a market where Western-style disclosure and policy standards exist. If part of these SWFs job is to be role models for other (presumably less up-to-date/professional) local investment/pension houses, they’re going to advance their disclosure incrementally, in steps other investors can mimic. Jumping forward to a Calpers-like transparency effectively dimishes their utility as local role models, simply becuase no-one else could keep up.
Dear Rachel,
I’m very pleased to see a post by you in our daily-read bsetser blog, after reading for a couple of years some hard-worked pdf-s made by both of you for RGE.
It seems that Brad is so busy that doesn’t answer to guest bloggers comments.
I’ve been told that a democracy is ruled by its laws and we all are equal to the law, and our democratic laws are so great that nobody will be discriminated at all.
That’s west democracy!
As I’m a little citizen from a very small country trying to get its sovereignty in an autonomous law-area without a state and inside Euroland, while living and suffering the global economies consequences, I have to make you a couple of shy points:
1.— We, the readers (I’m talking in the name of most readers of this blog, arrogantly) would appreciate a lot, a little bit more of personal tone in a bsetser blog post: Instead or a RGE style PDF, just a clever conversation with some data on its ground. Some comments would be welcome, of-course!
2.— Lately, there is a lot of noise about SWFs, China and Gulf Countries. But nobody in USA talks about Japan and its yen (China and yuan breaks all pages), SWFs of those countries but not about hedge funds of west economies, Interest Rates explaining commodity prices (I’m with gillies of last post in this subject)… and Brad is silent…
3.— If you are frightened of losing your financial sovereignty, It’s because of Chinese or for your own leveraged banks?
I’d make a stupid question to brad and you: Is it more important the 10 trillion debt man (as Calculated Risk figures out GWB presidency costs or the 2 recession president as Menzie Chinn wrote about him) or the sexual affair of the Governor of NYC (wasn’t he using his own cash?)
It’s seems that phelation is worse than an illegal war or a financial depression, or more accountable (out of entertainment industry, of course); Presidentially speaking.
So what?
Does anyone think, in his right mind, that SWFs, wherever they come from, have any other goal than making money from whoever back?
Does USA show some morality to the world, out of military power and nukes?
What’s all that noise for?
In the end, all sins will be the the result of an unsustainable twin economic deficit of USA and not the immorality of your policy, of course!
Who made the wrong decisions? The Chinese? The SWF of Abu Dhabi?
Best wishes
Koteli
PS: If you want to feel a bit of sentiment from Russia (with its doses of hate), here goes a reading:
THE EXILE - “Shock Therapy” Hits America Where It Hurts
The reading in http:
http://www.exile.ru/blog/detail.php?BLOG_ID=17818&AUTHOR_ID
Lately, it seems that Paul Krugman and Nouriel are about the only people writing their mind.
Thanks!
Volker speking today:
Rose: Has [the economy] bottomed out, or have we seen the worst?
Volcker: Look. The basic economy is not irretrievably damaged in any way, shape, or form. We had to go through an adjustment, which is tough. It’s happening much quicker. You’d rather have it happen gradually. But I’m optimistic that, okay, we’ve got to get the consumption down, we got to get spending in line with our capacity to produce. I think that’s going on. And that process is going to take a while. If we can stabilize the financial market, we ought to come out of this. Then we’ve got a lot of work to do about what we do with the regulatory system, the supervisory system, what the role of the Federal Reserve is, what the role of the Treasury and the government is, because this is a different financial market.
There is just no way for sovereign funds to make money in the present financial environnment. Asset prices are falling and will keep falling in line with the suply and demand for credit, this until the debt/GDP ratio stabilizes at amuch lower level.
This move from one sovereign fund is nothing but a joke.
The party is over. Nobody wants to borrow anymore, noone wants to lend. Close the borders, to capital, labor, and goods and services. Manage economies instead of letting the market mobs run everything havoc. This is a new era.
At least Al Qtabia seems to be awake, and aware of what’s going on in the world. Unlike, well, a certain W comes to mind…
http://www.uclick.com/client/nyt/bs/
@koteli
“Lately, it seems that Paul Krugman and Nouriel are about the only people writing their mind.”
True, but it doesn’t help much if their conceptual framework is out of sync with reality. Take Krugman’s latest post “Liquidity trap watch”. He says “it’s been easy to forget that we still have the problem of a weak real economy”
Yes, the US does have a problem with it’s real economy, but it’s not lack of demand. It’s lack of production of essential real stuff. Crude oil particularly.
The US is taking for granted that oil exporters will keep trading their absolutely exhaustible resource for printed paper, and moreover will keep stashing that printed paper (or promises to get more of that paper in the future) while the US keeps debasing it in order to sustain US demand for that oil! “Just trade your oil for my paper, and be sure that I will print whatever amounts of paper are needed to sustain my demand for your oil, so that you can keep trading it for my paper!”
The Washington Consensus Elites led by Alan Greenspan and Robert Rubin have no one to blame but themselves for the US Financial Fiasco. The end is near for US Global hegemony in the economic and geo-political sphere. - Dave C.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080319.wxcofinance19/BNStory/specialComment/home
In the past three decades, a neo-conservative ideology that asserts markets are infallible and, as a result, disparages any kind of state regulation has come to dominate thinking about economic matters, especially in the United States. Alan Greenspan, the long-time Federal Reserve Board chairman until 2006, was an ardent advocate of this view, and it became an article of faith in powerful U.S. political and economic circles - not surprisingly so, since it justified letting economic elites pursue their interests with little government interference.
Central banks, especially the Greenspan Fed, wanted to reinflate their national economies, so they looked the other way as unregulated quasi-banks created a colossal edifice of credit - a tightly coupled global architecture of debt instruments that no one fully understands. And we’re now realizing that something close to endemic fraud aided and abetted this enterprise: Credit-rating agencies such as Moody’s and Standard & Poor’s put their triple-A imprimatur on securities underpinned by crummy assets; investment banks held major liabilities off their books; and nearly everyone in the business established the value of complex securities by reference to numbers churned out by impenetrable computer models - not by reference to prices in real markets.
JohnH: Suppose a group of SWF’s get together, say Saudi Arabia, China, and Japan, under the auspices of protecting their dollar denominated investments….
I doubt you could get Saudi Arabia, China, and Japan to coordinate economic policy against the US. Each of them is far closer to the US than they are to each other. In particular, I can just imagine the conversation between China and Japan, “so after we do succeed in levelling the US, which one of us is going to be in charge of East Asia?”
DC: The end is near for US Global hegemony in the economic and geo-political sphere.
Hardly. Last weekend, you had people from the Federal Reserve, the Treasury Department, the Office of Comptroller of Currency, the SEC, and some major investment banks in one room in New York City trying to figure out how to keep the global capital markets from collapsing. They were in NYC, and not London, Dubai or Shanghai.
There’s no other nation with the power of the US to through action or inaction either make or break the world economy, and this is not likely to change any time soon.
Twofish,
Wrong, the German-run ECB and Japan Central Bank haven’t lifted a finger or contributed a dime to the Federal Reserve’s bailout of the US Banking system. The barking dogs at CNBC can complain all they like, the German word for “no” interest rate cuts is “Nein”. The rest of the world is laughing at the incompetence of US Banking regulators.
When imports (14 percent of GDP) are bigger than the all the YEARLY industrial production of US put together (12 percent), I would not be going around saying that this or that other currency is overvalued. Dollar is still overvalued and a lot.
One more comment. Until recently, Hank Paulson and Ben Bernanke couldn’t talk enough about how China’s stable currency policy imperiled global prosperity. The Washington Consensus mantra was, “It’s all the fault of those Chinese”. But it wasn’t the Chinese yuan at all. The real problem was bad US lending practices, Enron-style creative accounting, and US financial regulators asleep at the wheel. It’s the US utilizing “beggar-thy-neighbor” devaluation of its currency to dig out of a recession. When Hank Paulson restates a “official strong dollar policy”, should he just be labelled a liar.
Thanks for your comments!
Anonymous - yes any of funds could have written that. They are a pretty unobjectionable set of guidelines and in keeping with what’s known about the funds. True, they don’t actually disclose that much information, besides confirming that 80% of ADIA’s assets are under external management. what’s surprising is that until now none of them have - a certain level of disclosure from them might alleviate some worries and make the process more predictable.
The SWF challenge of finding place to put funds is shared by a whole range of institutional investors. These countries have a lot of funds and are testing out ways to manage them to get higher returns and spillovers to domestic economy.
Koteli - if you’re looking for more data analysis - check out my preliminary take on the TIC data from earlier this week. I’m sure Brad will take up the topic in a few days when he’s back.
RealThink -
already many oil exporters are not willing to keep just buying bonds. though as long as they keep their dollar pegs, they can only diversify so far - witness the UAE’s reserve growth (over $20b in the first nine months of last year).
Twofish: Don’t bet that SWFs can’t get together–the prospect of individually losing your shirt or collectively saving it can make for some pretty strange relationships.
Abu Dhabi’s investment strategies.
this shows how illiterate they are..give them warren buffet books….else they are going to invest in crappy stuff here in US and lose money
useless folks, tey r
How much power do SWF really have to resist attempts to demand disclosure? Is the argument that SWFs will take their money elsewhere credible?
Most of the countries with SWF seem to peg their currencies to the dollar. To sustain those pegs, they have to buy large quantities of US denominated assets each month. If they don’t sustain those pegs, then their domestic currency will appreciate via the US dollar and the SWFs will take an immediate hit to their balance sheets. Moreover their positions in dollar denominated assets are so large, that closing them out would involve even more losses on those US denominated assets. In short disclosure is probably the least expensive choice for the SWFs.
Seems to me, the US has a lot more leverage here than they realise. What it lacks is the will to address this issue.
This is also why I think the idea of some sort of SWF cartel probably is a non-starter. The only way the cartel could function is if there was a credible claim that China, Japan and the Saudi’s were no longer interested in defending their pegs (or floating pegs) to the US dollar. Only if they were willing to agree to stop defending their currencies is the claim that they might invest elsewhere credible.
But is the domestic economy in China robust enough to absorb both the people thrown out of the export sector as well as thrown off the farm if the renminbi was to appreciate rapidly against the US dollar? Is Japan’s economy appreciably better in this area?
These countries are spending huge quantities of capital intervening in fx markets because the alternatives seem much worse to them.
Financially how much does disclosure really set them back?
Ed: How much power do SWF really have to resist attempts to demand disclosure?
Quite a bit.
US: Tell me what stocks you own!!!!!
SWF: What stocks? I don’t see any stocks around here. Hey, Abdul. Do you see any stocks?
If it is fund based in the US, the government can say “tell me this or I shut you down and toss people in jail.” If it is a fund in the British Virgin Islands, this is much harder, and you start running into international jurisdictional issues.
Also, it’s not clear to me “disclosure for what purpose,” If it is to prevent surprise takeovers of US companies, then the Williams Act will do fine.
“There’s no other nation with the power of the US to through action or inaction either make or break the world economy, and this is not likely to change any time soon.”
Written by Twofish on 2008-03-19 11:03:39
If you control a resource you can increase or decrease the supply at will.
We usually think of resource control being about getting more of something.
But decreasing supply can be an effective projection of power.
Say, for example, you had control of Iraq and Saudi Arabia and Iran and Afghanistan and Iran and and…
You could maybe make damn sure you didn’t have to suffer the ignominy of $12/barrel oil ever again.
http://images.google.com/images?q=oil+price+history
Taxpayer: Say, for example, you had control of Iraq and Saudi Arabia and Iran and Afghanistan and Iran and and… You could maybe make damn sure you didn’t have to suffer the ignominy of $12/barrel oil ever again.
Afghanistan doesn’t produce oil. Also to really control the price of oil, you really need to control Russia. Good luck with that….
In any case, trying to prevent the price of oil from going down doesn’t really require control. For example, the Saudis could theoretically flood the world market with cheap oil, but why would they want to do that?????
I think the comment suggesting SWFs take over running the US economy is a good one since we don’t seem able to manage our financial affairs intelligently on our own. I’d be delighted to have a sensible, well capitalized SWF telling the US Treasury what to do. It could only be an improvement. Bring ‘em on.
Twofish
If foreign entities seek to disclaim US assets, then the US government can seize the abandoned assets. The IRS already does this. So that isn’t an effective stragedy.
If you want access to US markets, you have to play by US rules. As much as Toyota or Shell or Nestle would prefer to pay no US taxes, they pay them because its a condition to access to US markets. In the process of paying the taxes, these entities already face substantial disclosure requirements as part of filing their filing statements.
In theory Toyota, Shell or Nestle could take their money elsewhere to avoid US taxes - but if they did they would lose the benifits of investing in the US. Thus in practice they pay US taxes.
The real issue is whether the benefit is bigger than the burden. Given how much resources these countries have already expended defending there currency pegs (and floating pegs) my hunch is that the benefit is substantially bigger than this burden and the SWFs would comply with the disclosure requirements.
Ed: If foreign entities seek to disclaim US assets, then the US government can seize the abandoned assets.
No one is disclaiming anything. You have a share which is registered to a broker, in the account of a corporation in the British Virgin Islands, which is owned by a trust, which is owned by a holding company, whose board of directors is consists of a Saudi family. It was bought and sold in London. The corporation is a Delaware corporation, and corporate law is state law, not federal.
If the US gets really annoying, then create a child company that contains only the shares that are subject to reporting requirements, and keep the parent private. The other option is to generate so much paper that no one can keep track of what you are doing. You take CIC, split it up into about a thousand small companies, issue reports for each of those, and then good luck piecing them together.
Ed: If you want access to US markets, you have to play by US rules.
So do the trade in London or Hong Kong or Luxembourg or find some nice tiny island in the south Pacific, set up some computers and create a financial center there.
Ed: Given how much resources these countries have already expended defending there currency pegs (and floating pegs) my hunch is that the benefit is substantially bigger than this burden and the SWFs would comply with the disclosure requirements.
Much, much cheaper to pay lobbyists to keep the regulations from getting passed, and lawyers to figure out clever ways around them
For about $50 million/year, you can buy a team of K Street lobbyists that will create loopholes and a team of really, really good Wall Street securities, taxation, and corporate lawyers that will exploit them. That’s peanuts in comparison to the amounts of money we are talking about and the value of secrecy.
the contributors (to this thread) most of whom i assume - but do not know for sure - are united states citizens, seem to think and fear that the sovereign wealth funds of various and diverse nations might tend to act patriotically (”politically”).
so perhaps the united states should learn to save money, and set up its own sovereign wealth fund ? at the moment i read that the banks borrowing funds from the fed are not lending them out but investing them in euro denominated bonds. is this true ? the enemy is often closer to home than you think.
. . . . and i am not going to let go of this question : the japanese have reserves of $900 billion. they remain inscrutable. they cannot relish another trip to the (refurbished!) plaza hotel. they are in double jeopardy, because a panic out of the carry trades could presumably hand them a spike in the value of the yen, and a massive kick up the exhaust pipe for toyota and co. more deflation ? what is in the japanese psyche at this moment ? what options have they ?
and on the question of coordinated policies. if the united states’ financial recklessness were to threaten global stability, that in itself might create unlikely bedfellows. china and russia and brazil ? venezuela and iran ? any combination of countries sensing a common threat can evolve a common policy. hitler made allies of great britain and communist russia in ww2. that was unlikely, too.
but not to worry. with bernanke half out of confetti - who will replenish the s w f s?
- and all of abu dhabi’s bets - oil, luxury tourism, airlines (?), financial services - can turn out to be bubbles.
Well the US’s ability to set the rules in such a way that they prove unacceptable to foreign investors is limited by its need for such investments. My suspicion is that it will have an overwhelming need for this money to come in (so far it has kept several major institutions out of bankruptcy) and will find going forward that its power to set the rules is not very great.
Twofish
If the amount of money was de minimis, then I think you would have a point. Its easier to obfusicate the real origin of small amounts of funds, and if the amount of money isn’t significant, it doesn’t make sense for the regulator to expend limited resources to try to track the source of those funds.
But the SWFs we are talking about are dealing with really large flows of cash. That makes it much more difficult for those funds to hide their tracks. If the funds want to atomize themselves into a billions of little companies to hide their actions from US regulators, then they have the compliance problem of keeping track of the actions of billions of little companies. Additionally the actions of those billions of little companies coordinating together will flag US authorities. Moreover when you have billions of little companies, you have created a billion opportunities for your own employees to steal from you. In short the administrative burden of hiding the source of funds would be substantial and still may not be successful.
Corporate law is state, but securities law is federal. Most securities of the securities act consists of required disclosures. If the feds want jurisdiction, they could either amend the securities act or amend the Internal Revenue Code or both.
The premise of many illegal tax shelters is setting up shell companies. US tax authorities have been very successful at piercing the corporate veil in these situations. They seize the asset and refuse to relinquish it until the real party identifies themself and files suit to recover it. This is how they get people who fled the country to avoid paying taxes. They seize the assets and make them present themselves in the US if they want to reclaim the assets.
In tax evasion cases, it doesn’t matter if title to the stock is held by the stockbroker, the feds just have the stockbroker turn the property over to them and then force the aggrieved party to sue to recover it back. The shell companies don’t matter. That the person who owns the property has fled the juridiction doesn’t matter. They have the property. If you want to recover your property you have to appear before a judge and in the process submitt to US jurisdiction. When you appear, the US attorney’s office can bring all federal causes of action against you - violations of US securities laws, tax laws etc.
In short while you may be able to execute trade from London, when those peices of paper represent changes in assets titled in the US, the Feds can assert juridiction on those assets and require that you appear before them if you don’t want to forfiet your property to US regulators.
Your argument that you can buy an exemption for 50 million might work. But your ability to do so depends on how high profile this issue becomes. In theory Dubai Ports should have been able to buy an exemption as well, but that issue became too high profile. If this issue becomes sensitive enough and during this election year, I think it could, then I don’t see this being an effective stragedy. But if the issue doesn’t become more prominent, then I think you are correct.
Ed: But the SWFs we are talking about are dealing with really large flows of cash. That makes it much more difficult for those funds to hide their tracks.
So do the trades in London using a BVI subsidiary. (Actually, that’s what people already do when they want to avoid the US government.)
Ed: The premise of many illegal tax shelters is setting up shell companies. US tax authorities have been very successful at piercing the corporate veil in these situations. They seize the asset and refuse to relinquish it until the real party identifies themself and files suit to recover it. This is how they get people who fled the country to avoid paying taxes. They seize the assets and make them present themselves in the US if they want to reclaim the assets.
The problem here is that the entity that the US is after is a corporate entity. The US seizes an asset, and then a lawyer appears representing the corporation owning the asset and demands that the asset be returned because the asset is legally owned by a company legally registered in the BVI.
You can also do this using derivative securities. I don’t own any stock in Toyota. I own a receipt that entitles me to receive the value of Toyota stock.
Ed: In tax evasion cases, it doesn’t matter if title to the stock is held by the stockbroker, the feds just have the stockbroker turn the property over to them and then force the aggrieved party to sue to recover it back
What if the stockbroker is in London? Feds don’t have jurisdiction there. The British will and do cooperate with the US tax authorities when it comes to enforce tax evasion. However if the US were to unilaterally create reporting requirements for SWF’s, it’s not clear that the British would go along with that.
Ed: But your ability to do so depends on how high profile this issue becomes. In theory Dubai Ports should have been able to buy an exemption as well, but that issue became too high profile. If this issue becomes sensitive enough and during this election year,
It really depends on what *the issue* is. The US is perfectly in a position to force foreign companies disclose control holdings in US companies. If you want to tell management what to do, eventually you are going to show up at a board meeting, and at that point you better have complied with the Williams Act or else a judge will keep you from giving any orders.
Anti-tax evasion is also easy because 1) you have something to do with the US or else you wouldn’t be taxed 2) you want to spend your money at some point 3) most governments will help you collect your taxes if you help them collect their taxes. In the case of SWF’s you are talking about groups that have nothing to do with the US, so there isn’t a hook that the US can use to force you to do something.
You also get into issues of international law and sovereign immunity. The US tells Dubai to report its holdings or else, Dubai says or else what?
One of the major reason I don’t think that the US will have any success unilaterally force SWF’s to disclose is that without international support the US is going to have all the luck it has in doing an embargo against Iran and Cuba. The various techniques that I’ve talked about are exactly the ones that US oil companies use to do business with Iran without violating US law.
Twofish
If title is held by an English stockbrokerage, then you can bypass that by impounding the shares at the corporate registery including everything owned by the English stockbrokerage. If the English stockbrokerage refuses to turn over the names of the people who own the custodial account - charge them with being accessories to the crime and keep sitting on all of their shares until they comply - use your leverage over the assets to go backward through the chain of title. Make the parties come to you to get the property back.
You can do the same with the derivatives. Go after the economic value of the derivative before it leaves US borders. Go after the US counterparty to the instrument and impound the proceeds before they are transferred out of the country. When the foriegn party seeks to sue in the US to enforce the contract - then you have jurisdiction over them in the US.
International law isn’t applicable. US law is only impacting SWFs when they decide that they want to invest in US domiciled assets. When they do, then they have to comply with US law regarding required disclosures.
As you pointed out with tax evasion, the law is easy because they are spending money in the US. But investments in US assets is also spending money in the US. That too is something that US authorities can easily go after. If SWFs are investing their money exclusively in non-US assets - you are right then US authorities can’t go after them. If the Singpore investment fund wants to invest money in Europe, why should the US care? But if they invest in Exxon, then US authorities can take control of the proceeds if the Singpore investment authority refuse to comply with US disclosure laws.
There are no issues of international law or sovereign immunity. If the fund doesn’t comply with required US disclosure laws then assets of the fund invested in the US are impounded until it does. The or else is the loss of the funds invested in the US. No one is forcing these funds to invest in the US. But if they do, then they must comply with US law.
Ed: If the English stock brokerage refuses to turn over the names of the people who own the custodial account - charge them with being accessories to the crime and keep sitting on all of their shares until they comply - use your leverage over the assets to go backward through the chain of title.
Unless the British government backs them up in which case you are hosed. The US government freeze British bank and brokerage accounts. They can ask nicely for the British government to do it. You really don’t have that much leverage over assets unless you can show that a crime has been committed.
Also, are we talking about the law as it is, or a law under some hypothetical regime?
Ed: You can do the same with the derivatives. Go after the economic value of the derivative before it leaves US borders.
The derivative was issued in London and was never in US borders.
Ed: Go after the US counterparty to the instrument and impound the proceeds before they are transferred out of the country.
The derivative was issued in London by a London investment bank. It is being hedged by shared owned by the investment bank. Those shares have nothing to do with the derivative.
Ed: International law isn’t applicable. US law is only impacting SWFs when they decide that they want to invest in US domiciled assets.
And if they choose to invest in a British Virgin Island corporation with US assets? The investment by BVI into the US is legal. The investment by the SWF in BVI is legal. There’s no connection between US law and the SWF, unless the US wants to extend its authority far beyond what anyone will let it.
Ed: But investments in US assets is also spending money in the US. That too is something that US authorities can easily go after.
But they aren’t directly. I invest in Exxon that invests in Exxon (UK) Ltd which invests in Iran. My investment in Exxon is legal. The investment from Exxon to Exxon (UK) Ltd is legal. The investment from Exxon (UK) Ltd to Iran is legal. Again, you could theoretically pass a law saying that anyone that invests in anything that invests in anything that invests in anything that does something illegal can be tossed in jail. I doubt that you’d get that many people to go along with it.
Ed: If SWFs are investing their money exclusively in non-US assets - you are right then US authorities can’t go after them. If the Singapore investment fund wants to invest money in Europe, why should the US care?
Stepping back a bit. It’s not clear what the rationale is for disclosure. If the reason for disclosure is to preserve the world financial system then yes it is matter very much what Dubai is doing in Europe.
If the reason is to prevent SWF’s from overly influencing US corporations, then I don’t understand what is missing with the current system of security filings. What CIC and Dubai can do (and I’m sure that they do do this) is to set up a British Virgin Island corporation which is wholely owned by Dubai without secrecy involved. Issue the reports for that sub, and then you know nothing about the parent corporation’s strategy.
Ed: There are no issues of international law or sovereign immunity. If the fund doesn’t comply with required US disclosure laws then assets of the fund invested in the US are impounded until it does.
Are we talking about the current law or a hypothetical future law. What I’m telling you is that you have to write the hypothetical future law careful to avoid all of the clever ways of getting around assets, and it’s really hard to do without doing large amounts of economic damage.
Before you write a new law, you need to explain what is the *bad* thing that you are trying to prevent. If it is SWF control over US corporations, then the Williams Act already takes care of that, and you shouldn’t have any problem with a SWF buying a stock future that is hedged with corporate shares since there is no management control associated with that.
Ed: If the fund doesn’t comply with required US disclosure laws then assets of the fund invested in the US are impounded until it does.
The fund doesn’t have any assets invested in the US. It might have funds invested in a European subsidiary of a US corporation which the US corporation channels dividends to. Is this a bad thing or not? You tell me what you are trying to do.
Why is it that you want the company to disclose its assets in the first place? This isn’t a rhetorical question. You need to figure out what it is you are trying to do before doing it.