Sovereign wealth funds not harmful: U.S. officials
WASHINGTON (Reuters) - Sovereign wealth funds, which have drawn criticism for recent multibillion-dollar injections into battered U.S. banks, are a good thing, but could be more transparent, officials said on Wednesday.
"Sovereign wealth funds have been a beneficial source of capital for U.S. financial institutions," said Federal Reserve Board General Counsel Scott Alvarez. He was one of several officials testifying before a U.S. House of Representatives financial services subcommittee on the topic.
Some of America's biggest banks, including Citigroup Inc (C.N) and Merrill Lynch & Co MER.N, have been forced to seek billions of dollars in fresh capital from foreign investors after suffering huge losses tied to risky subprime mortgages.
The investments have raised concerns that foreign governments might be investing for political rather than financial gain, and might someday use those stakes to advance their own national interest.
"Protectionist sentiment stems partly from a lack of information and understanding of sovereign wealth funds, which in turn is partly due to a lack of transparency and clear communication on the part of the funds themselves," said Treasury Undersecretary for International Affairs David McCormick.
Sovereign wealth funds currently manage an estimated $1.9 trillion to $2.9 trillion, more than hedge funds, and could grow to $15 trillion by 2016, experts have said.
The funds, many of which are in emerging market countries in the Middle East as well as Russia and China, have been bolstered by rampant oil prices and large U.S. trade deficits. These factors have accelerated the accumulation of assets abroad that are being reinvested back into the United States.
Citigroup alone raised about $12.5 billion after announcing a record quarterly loss of nearly $10 billion. Nearly $7 billion came from the Singapore Investment Corp Pte and $3 billion was from the Kuwait Investment Authority.
"What are we going to do to make sure that there is not an abuse of power?," said Rep. Paul Kanjorski, a Pennsylvania Democrat and the chairman of the House subcommittee on capital markets, insurance and government sponsored enterprises.
REGULATORY CONCERNS
The U.S. Securities and Exchange Commission has raised concerns about the funds' transparency and has questioned whether foreign governments would cooperate in securities cases involving their funds.
But Ethiopis Tafara, the SEC's director of international affairs, said the agency has a number of rules that require the disclosure of sovereign wealth fund activities, adding that the SEC was "not without tools when it comes to enforcement."
Even if a foreign country did not cooperate with the SEC's investigation, Tafara said that market manipulation, insider trading and other illegal activities that take place in the U.S. market often leave sufficient evidence that the agency can proceed with an enforcement action against the offender.
The Fed's Alvarez concentrated his testimony on the technical grounds under which the Fed would review a planned purchase.
Noting sovereign wealth funds had pumped $24 billion into U.S. financial firms in recent months, Alvarez said none of these investments had breached the 10 percent controlling threshold that would trigger an automatic Fed review.
"Most sovereign wealth funds, like many other investments ... have structured their investments so as not to trigger the threshold for review and approval ... and have designed their investment to be passive," he said.
(Additional reporting by Glenn Somerville and Alister Bull, writing by Alister Bull, editing by Gary Crosse)
